Crude Oil is the world economy’s primary energy source, making it a
very popular commodity to trade. A naturally occurring fossil fuel,
it can be refined into various products like gasoline (petrol),
diesel, lubricants, wax and other petrochemicals. It is highly
demanded, traded in volume, and extremely liquid. Oil trading
therefore involves tight spreads, clear chart patterns, and high
Brent crude is the world’s benchmark for oil with almost two thirds
of oil contracts traded being Brent oil. WTI is America’s benchmark
oil, it is a slightly sweeter and lighter oil compared to Brent.
WTI trades on CME Globex: Sunday - Friday, 6:00 p.m. - 5:00 p.m.
(with an hour break from 5:00 p.m. to 6:00 p.m each day) while Brent
trades on ICE: Sunday - Friday - 7:00 p.m. - 5:00 p.m.
When trading oil, the two major focal points is supply and demand.
Whether there was an economic report like a news event or press
release or tensions in the Middle East, the two factors that will be
taken into consideration is how supply and demand is affected,
because this will affect the price.
Expert oil traders generally follow a strategy. They will understand
fundamental factors that affect the price of oil and use a trading
strategy that suits their trading style. Each trading strategy is
different, risk management is an important component to consistent
trading, like the effective use of leverage.
Once a trader understands the fundamental supply and demand factors
affect the price of oil, he/she can look for entries into the market
using technical analysis. Then, when a buy or sell signal has been
identified using technical analysis, the trader can implement the
proper risk management techniques. Let’s go through an example...
On the 30th of November 2017, OPEC and Russia agreed to extend an
production cut, which lead to a decrease in supply. This is
the fundamental analysis a trader would need to incorporate into
strategy in order to identify buy signals in the market.