Oil is the most traded commodity in the world and for speculative traders, oil trading represents a potentially attractive combination of a large market and an actively changing price. At the same time, traders can be assured that they will find both buyers and sellers for the different types of crude oil on the market, and that there will typically be enough activity for them to develop profitable trading opportunities. The fact that oil is a vital component of all developed economies and most of the others, make the market similar to that of the foreign exchange where different currencies are a vital part of international trade. Parallel trading activity exists in the oil market as in the money markets. On the one hand, companies trade oil as producers, refiners and distributors and other professionals of the oil industry; whilst on the other hand, investors trade oil purely as a speculative activity with the aim of buying oil at low prices and selling it at high ones.
Oil trading and production history
World demand for oil and oil trading has increased over recent decades to a level that at the end of 2009 stood at 86 million barrels per day. The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Other oil exporting countries joined OPEC, which controlled as much as 55% of the world’s oil supply in the 1970’s and was able to set stable but high oil prices. Today the figure has dropped to 40% as new oil producing countries such as Russia, Mexico and Norway have made their presence felt on the market. OPEC has also been destabilized by factors such as political disturbance in some member countries (Nigeria for instance) and internal disputes.
The opportunity for oil trading
Over the past few years, the price of oil has fluctuated significantly. In 2006, the price was $60 a barrel. In 2008, the price rose to $147.27 a barrel before sinking to below $40 a barrel in 2009 and then rising again to above $80 in 2011. These price swings are considerably greater than in other markets such as currency trading, and can therefore bring correspondingly greater gains to speculators. Oil trading for speculation is done via oil contracts, not by physically buying any supply of oil. Depending on the broker for such oil contracts, they are closed and profit or loss accounted for on a regular basis, or renewed with the broker at the request of the investor.
Oil trading basics
Oil has its “currencies”, meaning the different types of oil produced. According to the oil producer and the composition of the crude oil, it may be suitable for different purposes and therefore attract different prices on the market. “East Sour Crude” from Middle East countries, “WTI Crude” from Texas and “Brent” from the oilfield of the same name in the North Sea are all examples of different types of oil, serving different markets. Oil trading contracts are typically quoted against the US dollar. They can be analysed and traded in similar ways to trading a monetary currency like the Euro or the yen against the US dollar. The same technical indicators and techniques of leverage also apply.
Oil trading and the transportation infrastructure
Oil, unlike money, needs to be physically transported from the place where it is produced to the place where it is used. Transport has to be both as efficient and secure as possible if impacts on prices are to be avoided. Much of the transport of oil today is done using tankers. This means that any problem, whether economic, political, ecological or other, that affects the movement of oil tankers will have a corresponding effect on oil trading prices. Supply problems can mean significant short term price changes in different types of oil and therefore trading opportunities for speculative oil trading.
Other indicators for oil trading prices
Oil trading prices are also affected by economic trends such as car sales and weather conditions. Cold weather will increase the amount of heating oil that is used, although the trading opportunities are more to be found when the weather is colder than forecast, and not simply in the yearly changes from summer to winter and back again. Likewise, travel forecasts in summer months will also affect demand for oil and real figures compared to forecasts will drive different trading opportunities. Economic recession in general will tend to depress oil prices as consumer demand for products goes down and so does the need for oil-based products in the whole production and transportation chain.
What is the future of oil trading?
The debate is still open about the future of oil as a commodity. On the one hand, alternative energy sources and substitution products are being developed that will reduce dependency on oil, tending to reduce oil prices. On the other hand, some observers predict oil shortages in the coming years as different oil fields reach their “peak oil” point and production then starts to decrease. In this case, the effect would be to make oil prices increase. To make the situation even more complex, new technologies and oil extraction methods are making other untapped resources available to produce oil, such as the oil sands of Canada. Prices in the oil trading market may therefore continue to move up and down in the foreseeable future.