What is oil?
Oil – one of the most important minerals of the Earth, which is a flammable oily liquid, predominantly black in color.
On financial exchanges, oil is traded using a variety of assets, including futures, options, contracts for difference, shares of oil companies, etc.
Oil is one of the most sought-after investment assets. You will find Brent and WTI oil quotes from each broker. Let’s talk about what influences oil prices, how to invest profitably in it.
Can you invest in oil?
From a financial point of view, oil and petroleum products (gasoline, diesel and other fuels) are an attractive way to invest funds. Oil prices, like any other product, are determined by the levels of supply and demand. If supply decreases, prices rise until demand matches supply. At the same time, the peculiarity of oil lies in inelastic demand, i.e. as the price rises, demand does not fall. In this regard, a decrease in the volume of supply leads to a sharp increase in oil prices…
Thus, oil and its derivatives are not only a raw material and commodity on international markets, but also a popular financial asset among exchange trading participants.
How to trade oil?
There are several ways to trade oil:
- With the help of futures contracts, which are concluded on the commodity exchange;
- With the help of contracts that are concluded in the over-the-counter market;
- With the help of long-term contracts entered into by producers and consumers of oil.
The largest volumes of oil are traded on two exchanges:
- New York Mercantile Exchange (NYMEX);
- London Stock Exchange (InterContinental Exchange, ICE).
In less significant volumes, oil is also traded on the exchanges of Tokyo, Shanghai, Dubai.
The over-the-counter oil market, in contrast to the exchange market, does not have any specific location. It can be described as a global brokerage network, within which transactions for the sale and purchase of oil are concluded.
On the exchange market, there is a standard volume of oil traded, which is usually 1,000 barrels per contract. There is no such standard on the over-the-counter market, trade operations are possible with any volume: one railroad tank car, two tankers, etc., with delivery to a selected point in the world.
Oil prices emerging in exchange trading are widely disseminated on relevant websites and are often mentioned in news reports. Prices that are formed on the OTC market have not received such distribution, they can be found in the reports of oil price agencies such as Platts or Argus Media.
Technically speaking, trading oil is no different from trading Forex currency pairs or other assets in the OTC markets.
What are the most popular oil brands?
- In Europe and Asia, the reference grade is a mixture of crude oil from 15 fields located in the North Sea, and received the name Brent…
- In the United States, a marker variety is considered WTI (West Texas Intermediate) oilwith an alternative name Light sweet…
- In the Middle East, the benchmark is a blend of Dubai and Oman crude, dubbed Middle East Crude…
- Russian oil Urals is a mixture of oil from fields in the Volga-Ural region and fields in Western Siberia. There are about 200 major oil grades in total.
Due to the large number of oil grades, highly liquid oil grades were identified for exchange trading: Brent, WTI and the Middle East. Since competition in exchange trading is almost ideal, oil prices formed on exchanges are considered to be the most objective.
What affects oil quotes?
Like the cost of any product, oil price depends on supply and demand…
It should be borne in mind that in practice, these two seemingly simple components of quotes are influenced by many factors. Actually, everything that can in one way or another (directly or indirectly) affect the production or consumption, purchases of energy resources, can affect the situation on the commodity markets. Especially if investors who trade in oil contracts believe in the effectiveness of one factor or another: there is always a speculative element in the price level.
What are the main factors affecting supply and demand?
- Position of oil exporting countries. OPEC (an association of countries that are the main suppliers of black gold to the world market) can assign one or another quota for production. It is obvious that the strong-willed decision of OPEC to reduce the quota greatly reduces the supply and pushes the price up.
- Political instability in oil-rich regions as a factor hindering the supply and transportation of energy.
- Similarly, supply can be mitigated by various (non-policy) conditions that hinder free trade – for example, natural disasters, bad weather conditions, pipeline accidents, and so on.
- Political decisions to increase or decrease US oil reserves. Low stock levels can push demand – buyers’ concerns are at work (“stocks are low!”).
- General growth / degradation of the world economy: after all, the larger the world economy, the more energy it needs.
- Scientific developments, the adoption of certain bills: for example, an increase in the share of electric vehicles in Europe led to a certain weakening of the position of oil.
In addition to these rather obvious factors, the following should also be noted:
- First, oil price fluctuations can simply be caused by the “big game” of wealthy investors. The speculative element in commodity markets is no less than in purely financial ones.
- Secondly, it is also necessary to take into account the rate of the American currency. After all, goods (including black gold) are priced in relation to the dollar – the pair looks like this: USD / barrel. Therefore, a weakening dollar means a rise in oil prices and vice versa.
What are the effects of oil prices?
Sharp fluctuations in world oil prices are directly reflected in countries whose main source of income is the sale of oil and petroleum products. A collapse in black gold prices means a fall in the exchange rate of the national currency, an increase in consumer prices and threatens with a state budget deficit, whose revenues depend on the oil and gas sector.
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