Trading Crude Oil

You will learn about the following concepts

  • Introduction to crude oil trading
  • Supply and demand
  • Pricing factors

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Introduction

The last commodity we will talk about is crude oil. This is one of the top three most traded assets in the binary options market, so we strongly advise you to get familiar with all the details about crude oil because it will surely continue to be an important part of binary options trading.

Crude oil’s popularity in trading stems from its fundamental role in modern life. As a commodity used to produce energy resources to power modern transportation vehicles, crude oil has become irreplaceable, or at least in the near future. It was only in the dawn of the 21st century when alternative-powered vehicles using electricity and hydrogen were developed, with the former making their first steps into the mass market just now, while the latter still have a long way to go.

Fluctuations in the raw material’s price have a broad effect on prices of goods and services, due to the changes of transportation costs, which in terms affects economic activity. Moreover, price changes affect major producing countries as well, given crude oil’s large share in their exports sheet. One of the brightest examples is Canada, which is one of the few highly developed economies that is a net exporter of energy, and especially crude oil. This, of course, implies a strong correlation between crude oil prices and the Canadian dollar. To learn more about the Canadian economy and its ties to commodity exports, read our article “Profile of the Canadian Dollar – Economic Overview and Monetary Policy” and its follow-up.

The common fractions of crude oil as fuels are: petrol, diesel, kerosene, jet fuel, fuel oil, liquefied petroleum gas and butane.

However, fuels are not the only byproducts of crude oil. The raw material is used for the production of alkenes, which can be manufactured into plastics or other compounds, lubricants, asphalt, wax, paraffin wax and others.

Crude oil pricing factors

oil barrelCrude oil holds a fairly stable value due to the overall constant rate of global production and demand. However swift and wide fluctuations can also be observed, especially during times of geopolitcal tensions at, or near major oil producers. The best way to approach crude oil binary option trading is to rely on fundamental analysis and use technical analysis to determine the best entry and exit points for your trade. Here are some of the main factors you should be on the lookout for:

  • Weekly US crude oil inventories report, due at 14:30 GMT on Wednesday
  • Monthly IEA and EIA oil market reports
  • OPEC, Russia and North Sea production
  • Natural disasters that may affect crucial infrastructure, especially in the Gulf of Mexico and the North Sea
  • Geopolitical turmoil at or near major oil producers, especially in the Middle East
  • Economic data from major oil consumers which may point to an acceleration or deceleration in economic activity, and thus in oil demand, especially in the US, China and Europe

The inventories report is the first data checked by investors when they plan to bet on crude oil binaries. These reports are released by the US Department of Energy every week on Wednesday and show how many barrels of crude oil are held by US firms, excluding the Strategical Petroleum Reserve which is maintained by the US Department of Energy. Because the US crude oil inventories report reflects changes in the supply-demand balance, the report often causes prices to fluctuate. However, because the government report is not the only factor affecting oil’s pricing, your analysis cannot be based solely on the EIA statistics, which means you need to combine the information received from the report with other data to make an accurate prediction.

Weather and disasters

tornado-iconWeather reports can turn into one of the most important factors that affect the price of crude oil. For example, if weather agencies predict a long and cold winter, then it is very likely that there will be higher demand for heating fuels. Also, extremely cold weather typically causes vehicles’ engines to use up more fuel, driving additional demand.

Natural disasters such as hurricanes will also affect oil’s price. Oil platforms located along the US Gulf coast are often hit by hurricanes which significantly reduce their operation capacity by forcing staff evacuations. This in terms cuts supply output and causes a jump in prices.

Seasonality is also a factor as refineries are typically shut for maintenance to switch to the production of summer- or winter-grade fuels ahead of the respective season.

Economic data, unrest

As logic dictates, major economic data and macroeconomic events also affect oil’s pricing since a contracting global economy will spur less fuel demand as opposed to booming growth. Thus, during times of recession, oil is typically trading at lower prices, in case there are no threats on the supply side. Conversely, economic expansion implies higher demand for oil, and thus higher prices. Oil traders’ focus is primarily shifted toward data from the United States, China and the European Union (as a single entity), the world’s top three consumers.

And last but not least, geopolitical turmoil at or near major oil producers tends to have an immediate and strong effect on oil prices, especially when it comes to members of the Organization of the Petroleum Exporting Countries and neighboring nations, as well as Russia – the world’s top energy exporter.

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