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Oil Trading

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.