Hello and a very warm welcome to another of my financial sites, which I hope will explain everything you need to know about trading oil, a complex market and one which is little understood by many oil traders, even those experienced in trading other instruments and markets. In the last twelve months oil trading has hit the headline with many financial analysts ( such as Goldman Sachs) forecasting a target of $200 in the next 18 months, despite the recent pullback to more ” comfortable prices” of around $70 again. Whether this will happen or not is of course pure speculation, and indeed is how we all live as oil traders, but one thing is crystal clear – this market is like no other. To be successful you have to understand the laws of supply and demand, have a thirst for knowledge, and think laterally, not in a straight line. Talk to professional oil traders and you will find that their success is based on their contacts, who in turn will provide them with the advance information of likely supply or demand issues, coupled with those acts of war, nature and political unrest which can bring immense volatility into the oil markets without warning. Information, research and analysis will be the key to your success – if all this sounds rather too academic for you, then I would suggest you won’t make it, trading oil for yourself or anyone else. If on the other hand you are prepared to study, research and learn, in much the same way as for a degree or doctorate, then I would suggest you have the temperament to be successful. So in summary, I hope that this site will provide the basic building blocks to help you to understand the market, the risks, the possible rewards and the instruments available for crude oil trading in all its various forms.
Of all the raw commodities that are extracted from the planet, none have more impact over world economies and the balance of political power, than oil. Indeed it is often said that the next major conflict will be a struggle for control of our natural resources, and not for territorial gain. With increasing demand and only a finite supply, the conclusion would seem obvious, that oil prices must continue to rise inexorably – yet this takes no account of the speculator, and for those of you reading recent reports in the national press, and on TV, it is the speculators who have been largely responsible for driving crude oil prices higher in the last 12 – 18 months. Indeed one report recently in the New York Times suggested that 80% of Americans believed that recent oil prices were manipulated and driven by speculators, and it seems that Congress, and more recently the CFTC agrees. Armed with this report suggesting that this is indeed the case, they are currently renewing efforts to introduce legislation excluding institutional investors from oil futures trading in the commodity markets. Even Senator Obama has added his voice, calling for tighter regulation on oil speculators, proposing a closure of the so called “Enron loophole” (which allowed crude oil trading transactions to be hidden from the authorities) and better regulation of the oil futures market. Whether any of these initiatives will come to fruition is anyone’s guess – my own is that they will not, and like many other attempts to regulate markets or trading activities, will simply become buried in a bureaucratic quagmire. One could equally argue that the relationship to the US dollar is of equal importance, which again ( if one believes the press ) is manipulated by speculators. This is another factor I will cover in detail later. So is all this public vitriol justified and how much influence do we as oil traders and speculators really have in the price of this precious commodity? Let’s start by taking a look at the history of oil and start to learn about the whole business of trading oil, and then move on to look at the markets and the opportunities for us to trade.
It is hard to imagine a world without oil, oil trading, oil trading companies, or an economy that is dependent on crude oil or the refined petroleum products produced downstream, such as Brent crude, light sweet crude, etc and yet it is only 150 years since it was first discovered in the US in 1859. At the start of the 20th century it supplied only 4% of the world’s energy. Today this figure has risen to around 40% for energy, and a virtual domination of the transportation market at 96%.
In the context of what we have consumed, with what is still left in the ground, in rough terms we have consumed approximately 875 billion barrels ( give or take a few!!) with another 1,000 billion barrels to come from those reserves currently identified. With world oil consumption rising inexorably, and with feeble attempts to provide alternative sources of energy, it is forecast that global consumption could double in the next decade, with China and India leading the way. China’s growth is expected to be 7.5% per year, and India’s a relatively modest 5.5%! This compares to a meagre 1% for the major industrialised nations! Long term, the conclusions are obvious – at some point in the not too distant future we are simply going to run out, or crude oil prices will go so high, many of the less developed economies will simply collapse until alternative sources of energy are found. In the shorter term it is more difficult to forecast for us as online oil traders trading oil, so let’s start by considering the history of oil, it’s supply to the market and the factors that have affected oil prices in the past, and probably will again in the future.
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