Thanks to its unique position within the world’s economic and political structures, crude oil trading provides excellent profit opportunities in virtually all market conditions. Furthermore, energy sector volatility has increased dramatically in recent years, ensuring clear patterns that can generate consistent returns for short-term swing trades and long-term timing strategies.
Market investors often miss out on the full benefits of crude oil volatility. They either haven’t understood these markets’ peculiar characteristics or aren’t conscious of the hidden pitfalls that can eat away at profits. Furthermore, not all energy-focused financial instruments are created equal, with a subset of these segregated into two categories.
Wanting to Trade Crude Oil
If you want to trade the oil markets, you’ll find that this important commodity is a very liquid asset class to trade various strategies.
Decide what is acceptable for you first:
- A spot oil (and, if so, what grade)
- A derivative commodity, such as futures or options
- An exchange-traded product, such as an ETN or ETF
Then concentrate on the dynamics of the oil market. Some things to consider are what determines supply and demand as well as technical metrics derived from maps.
What Is The Best Way To Invest In Oil?
Here are the five steps to consistently profit in the markets:
1. Understand What Causes Crude Oil to Move
Crude oil moves through supply and demand perceptions, driven by global production as well as global demand. Crude oil traders are encouraged to sell crude oil markets because of oversupply. Although, increasing demand and decreasing output allow crude oil traders to offer crude oil higher. When crude oil responds to mixed conditions, market action appears to shape narrow trading ranges, with sideways action lasting years.
2. Consider the Audience
The oil futures markets are dominated by professional crude oil traders and hedgers, with industry players taking positions to counter physical exposure and hedge funds speculating on long- and short-term courses. Retail crude oil traders and investors have less clout in this industry than in more emotionally charged markets like precious metals or high beta growth stocks.
When crude oil prices rise sharply, retail’s power increases. Thus, drawing capital from small investors attracted these markets by front-page headlines and table-pounding talk show hosts. Following waves of greed and terror, underlying pattern momentum can be exacerbated, leading to historic climaxes and crashes that print extraordinarily high volume.
3. Brent Crude Oil vs. WTI Crude Oil
West Texas Intermediate Crude and Brent Crude are the two main markets for crude oil. WTI is a US product. Brent is sourced from more than a dozen fields in the North Atlantic. That includes the Permian Basin and other local sources. These varieties’ sulfur content and API gravity vary, with lower amounts being referred to as light sweet crude oil. Although WTI was more actively traded in the world futures markets in 2017, Brent has been a better predictor of global pricing in recent years.
4. Take a look at the Long-Term Chart
After WWII, WTI crude oil rose and peaked in the upper $20s. It then dropped into a narrow band before the 1970s embargo sparked a parabolic rally to $120. Moreover, it peaked in the late 1990s and then began a long decline. But it fell into the teens just before the new millennium. In 1999, crude oil started a fresh and strong uptrend, reaching an all-time high of $157.73 in June 2008. It then fell through a wide trading range between that amount and the upper $20s. It eventually settled at about $55 by the end of the year. Finally, it traded at about $47.1 in January 2021.
5. Choose a Location
The WTI Light Sweet Crude Oil futures contract (CL) on the New York Mercantile Exchange (NYMEX) trades over 10 million contracts a month, providing excellent liquidity. Due to a 1,000 barrel contract unit, the 01 per barrel minimum price fluctuation carries a relatively high risk. Hundreds of other energy-related items are available on the NYMEX, the vast majority of which appeal to skilled speculators but few private crude oil traders or investors.
With a daily volume of more than 20 million shares on average, it is the most common way to play crude oil through equities. Production, exploration, and oil service operations all present different patterns and opportunities. So, oil companies and sector funds have a wide range of industry exposure. Although most companies follow general crude oil patterns, they can diverge dramatically for long periods. When stock markets are trending enormously, counter-swings are normal, with rallies or sell-offs causing cross-market correlation, which encourages lockstep behavior across sectors.
As many countries’ economies are heavily reliant on their energy resources, 10 Reserve currencies are an excellent way to take a long-term crude oil exposure. Under the tickers USD/COP and USD/MXN, the U.S. dollar crossed with Columbian and Mexican pesos have been monitoring crude oil for years. Thus, providing speculators with highly liquid and quickly scaled access to uptrends and downtrends.
These crosses must be purchased in bearish crude oil positions. However, they must be sold short in bullish crude oil positions.
Final Thoughts
To make reliable profits in the crude oil and energy markets, crude oil traders must have exceptional skill sets. Market participants interested in trading crude oil futures and options must understand what drives the commodity. It is imperative to understand the crowd’s dynamics, long-term price background, and physical differences between grades.
