Trading As It Pertains To Oil – Guest Post
Crude oil is a very important asset in the financial markets. This is because of the pivotal role it plays not just in world economics, but also in determining the behavior of other financial assets. So a trader who is conversant with the various crude oil correlations in the financial market will end up making more money from trading several assets, than another trader who is either stuck on just trading crude or trading some other asset on its own.
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Nowadays, crude oil is offered as a traded asset on many retail forex trading platforms, and this has opened up a vista of opportunities for traders to benefit maximally from the asset.
What are the important relationships traders need to know about crude oil?
a) Crude oil and the commodity currency
b) Crude oil and the US
c) Some key fundamentals of crude
Crude Oil and the Commodity Currencies
Among the countries whose currencies constitute the major currencies, Canada is the only one that is a total crude exporter. The US is a net importer, and Japan is a total importer of crude oil. Therefore changes in the price of crude affect these economies in diverse ways, with Canada profiting from rise in crude prices, while Japan takes the hardest hit.
As such, some currency pairings have come to be seen as being correlated with crude prices, and these can be traded according to the adjustments on the price of crude oil on a day to day basis.
a) Rise in crude prices – BUY the EURUSD or CADJPY, sell USDCAD.
b) Drop in crude prices – SELL the EURUSD, buy USDCAD.
USD – US dollar
EUR – Euro
CAD – Canadian dollar
JPY – Japanese Yen
Exact trade entry points must still be technically determined by the trader.
Crude Oil and the US
Following the Bretton-Woods conference, the US assumed a major role in world economics with all international transactions and commodity prices being USD-denominated. Many countries depend on the US for survival as a result of trade, aid and other forms of partnerships. The state of the US economy can therefore have a profound effect on the price of crude oil, either directly or as a spin-off effect.
Prior to writing this article, crude oil has gained for two days in a row as a result of promising talks on the US “fiscal cliff” issue. Commodities are particularly sensitive to issues like this. If the US is unable to meet its obligations, many economies tied to the US would collapse. Industries would shut down, jobs would be lost, purchasing power of workers would drop and all these will translate into a markedly reduced demand for crude, causing its price to tank. Therefore, the performance of the US economy is a key determinant of oil prices.
There are certain key fundamentals that are peculiar to crude and which traders should take note of:
a) Winter weather
b) Crude oil inventories
c) OPEC quotas
During winter, many homes rely on heating oil to provide heating and energy to take them across the cold months. Not having heating oil would be like a suicide mission. That is how important heating oil is in the winter months. A barrel of crude oil can produce two barrels of petrol and one barrel of heating oil. The increased demand for heating oil during winter will automatically translate to an increased demand for crude oil. It is rare to see crude prices sliding during the winter months because of the demand all over the Americas, Europe and Asia.
The crude oil inventories report is a report released by the US Department of Energy every Wednesday and is used as an indicator of global stockpiles of crude oil. On paper, a lower reading should produce a jump in prices while a higher reading should produced a fall in oil prices. In reality, a number of considerations are made in the context of the report before trade decisions are taken, so it is not abnormal to see crude oil prices not moving in tandem with the inventory report.
Politics and oil cannot be separated, as was shown by the 1973 Oil Embargo placed on sales of crude oil to the West. The desire to control prices through a control exerted on oil production by the key oil producers in the world led to the commencement of the Organization of Petroleum Exporting Countries (OPEC) quota system. Till date, the OPEC quota has become a major determinant of oil prices as quota restrictions cut supply, raise demand and force prices up.
Understanding some of these complex relationships would help a trader know better how to approach the trading of crude oil, or other assets that are linked to the performance of this asset.
Adam Grunwerg runs his own investment and trading website at Investing.co.uk.