Oil Trading

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Crude oil trading has been used since ancient times but the invention of the internal combustion engine and the growth of the automobile industry saw its value rise. Once a way was found to extract the oil at a viable rate the market grew, encouraging traders to speculate on oil prices. Today, crude oil trading is the basis of a global industry that encompasses its extraction, refinement and economic consumption, providing employment in many industries. Crude oil is used in the production of numerous chemical products such as plastics, fertilisers and solvents and is essential in maintaining our modern lifestyles. As a result, despite concerns about oil being a non-renewable resource many countries depend heavily upon it.

Since significant oil reserves are found in only a few countries, the market price of crude oil can be affected by national and international politics. Any change in major foreign policy needs to be considered by traders, along with economic factors, when trying to predict future oil prices. One recent example is the United States war in Iraq.

Crude oil is traded in barrels against the US dollar, and access to the internet enables traders to buy and sell hundreds of barrels of oil in a transaction through the MT4 trading terminal or any other in house developed trading platform. Similar to forex trading markets247.com charges no commission to customers that engage in oil trading; besides the spread between the buy and sell rates.

Facts regarding Oil Trading

  • Oil is essentially a form of energy.
  • A trader in the oil market must be fully aware that demand is often limitless while supply is always inadequate.
  • Knowing and understanding about the supply and demand of crude oil is critical when trading oil.
  • OPEC oil producing countries such as Iran, Nigeria and Venezuela are reaching peaking point of their oil production.
  • In non-OPEC countries such as Mexico and others in the North Sea, the oil production is nearing the peaking point too.
  • A fact states that oil production will continue to peak in the near future however eventually.
  • The oil supply will decrease while the demand will tend to rise increasingly.

 

Crude Oil

  • Crude oil can be defined as a combination of naturally occurring hydrocarbons.
  • The mixture is refined to generate diesel, fuel oil, jet fuel, gasoline and kerosene.
  • Diesel – traded as Platts ULSD Diesel 10ppm CIF North West Europe (NWE) or CIF Mediterranean
  • Fuel oil – mostly traded as Platts 1% or 3.5% sulphur content fuel oil.
  • Jet Fuel – generally Platts Jet fuel CIF NWE. In Asia this is referred to as Jet Kerosene and trades as Platts Jet Kerosene

Depending on the content and origin of the crude oil, it is named individually and is categorized according to each ones measure of gravity (API). The API can represent heavy or light crude. If it is light, it will create a higher yield of valuable gasoline more than heavy crude would.

The sulphur content of crude oil is just as important as it represents whether or not the costs of the oil can meet the environmental standards in the consuming countries. Crude oil with low sulphur content is sweet crude and crude oil with high sulphur content is sour crude. Nevertheless, sweet crude is popularly sought after because it commands a higher price. The lower refining costs are what give sweet crude a higher price command.

Oil Producing Countries

The main five countries that produce amounts of oil are:

  • Saudi Arabia – 10.6m bbl per day
  • Russia – 6.7m bbl per day
  • United States – 8.3m bbl per day
  • Iran – 4.2m bbl per day
  • China – 3.9m bbl per day

The majority of Crude oil comes from its two main sources of production; West Texas Intermediate (WTI) and Brent. Each producing geographic location is important as each one determines the transportation cost to the closest refinery. The derivative locations also hold various standards of liquidity.

West Texas Intermediate (WTI) – generates light, sweet crude oil that is distributed to Cushing, Oklahoma. It has the most liquidity in the world and is the main resource for North American oil.

Brent – generates a merge of various oils from the North Sea that is distributed to Sullom Voe in the Shetlands, UK. It is the second most liquid derivative in the world after WTI. The oil from Brent is the basis of what European oil prices are set at.

Dubai – Oman – generates sour crude oil from Middle East that is distributed to the Asia Pacific region.

The remaining derivative markets are Tapis, Minis and the OPEC Reference Basket (Organization of Petroleum Exporting Countries – oil blends from several OPEC countries). However these markets have low liquidity and trades are usually executed abruptly without preparation.

In total, the world consumes about 63m bbl per day of oil. The five key countries that consume the most oil are:

  • USA – 19.5m bbl per day
  • China – 7.8m bbl per day
  • Japan – 4.8m bbl per day
  • India – 2.9m bbl per day
  • Russia – 2.9m bbl per day

The NYMEX

The New York Mercantile Exchange (NYMEX) is internationally, the largest physical commodity exchange. It is divided into the NYMEX Division and the COMEX division. Trading in energy futures takes place at the NYMEX. Futures and options contracts are traded at NYMEX for heating and crude oil, natural gas, coal, electricity, propane, metals and gasoline. Trading oil is completely different to trading Forex, but it will require a wealth of knowledge of the market as you do with the Foreign exchange market and its currencies. Traders of oil have the option of trading crude oil and natural gas using E-Mini futures contracts trading on the CME (Chicago Mercantile Exchange’s Globex network.

Oil Trading Concluded

When choosing to trade oil, it is important that the above facts are verified and clearly understood. Associating the effect of events in the global supply of oil with the trader’s charts should become a chief objective of his/hers in the oil trading market. The trader should also keep an eye out for fluctuations as they can too increase additional profits. Unlike the Forex market, oil trading doesn’t possess such frequent price changes as currencies offer, but it does tend to move significantly according to conditions and availability of oil. Therefore it is crucial as a trader of oil to look constantly at the developments of the oil industry.