To develop top oil trading strategies for your group you will need to carry out an efficient analysis of the oil trading business. Knowing what the oil trading business entails is key to attempting to profit from the changing price of oil.
You can start creating your trading strategies by trading with CFDs on WTI crude oil or Brent. CFDs are financial products that allow traders to profit from market swing and trade through leverages. We are going to give you a breakdown of the fundamental analysis of the oil trading business.
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What Is Fundamental Analysis?
Fundamental analysts employ a variety of data sources to aid their research, including business earnings reports, geopolitical events, central bank policy, environmental variables, and more. They look for hints as to the market’s future path.
Such signals are frequently found in macroeconomic data, which is why fundamental traders must be aware of when necessary data is released. The markets are usually focused on potentially important macroeconomic readings that could have an impact on the market and cause volatility.
The goal of fundamental analysis is to develop financial forecasts using data from the past and present.
Fundamental Analysis of the Oil Trading Business
Factors that affect oil prices
The major driver for oil prices has to do with the global demand and supply. However, the factors which affect the swing in price can be affected by different global events which can make the oil price volatile. Here are some of the factors that swing the price;
The rise of global conflict between two oil-producing nations can lead to concerns about the future supply of oil which will, in turn, lead to a rise in the cost of oil. A good example of such an event was when a US Drone killed Iranian General Qasem Soleimani. This action led to fears that there would be serious conflicts between nations
The Universal health of an economy determines the demand level for oil. If in that period, there’s a rising demand, there will be an economic boom, and when prices drop recession and uncertainty follows. This can help us to conclude that there’s a relationship between economic growth and the price of oil.
When the pandemic started in early 2023, oil demand dropped due to the economic impact of the pandemic. As many companies shut down operations this led to an oversupply of crude with companies having no extra space for storage. With the excess oil in the market, oil prices dropped.
The Organization of Petroleum Exporting Countries (OPEC)
OPEC and its allies occasionally reduce or boost output in order to alter world supply and, as a result, oil prices. In April 2023, for example, members agreed to restrict output by 9.7 million barrels per day in May and June, with the agreement later extended through July.
Reduction in supply caused by equipment failure or destruction can cause scarcity of oil in the market which will lead to a rise in the cost of oil prices.
A drone strike on Saturday, September 14, 2019, destroyed a prominent Saudi Arabian oil refinery, causing it to shut down half of its total oil production. This cut world oil production by 5.7 million barrels per day, or 5%.
The US Dollars
The crude oil trade is performed in US Dollars and that creates an unambiguous relationship with the trade. When the price of the dollar is high, oil prices soar higher, especially for non-dollar buyers. This leads to a drop in global demand which will lead to a price drop.
The Federal Reserve began a program of strengthening the dollar in 2013. Commodity prices, such as crude oil, began to plummet in 2014. However, it is vital to note that the stronger dollar simply accelerated the price drop.
International relations matter between countries doing business especially oil sales as if they ever get into conflict, this will affect the demand for oil from that country negatively while increasing the demand for oil from another country. The result will most likely be a decrease in oil output in that country.
Politics can also have a significant impact on energy prices. For example, the price of crude oil increased to over $115 a barrel in 2013 when the United States stated it would employ military attacks against Syria. Although Syria is not a significant oil producer, traders were concerned about the impact of an airstrike on other oil-producing countries, such as Iran.
There have been numerous instances where political issues have disrupted oil supply and influenced prices. Many Americans recall the 1973 Oil Embargo, in which OPEC members imposed a trade embargo on the United States in exchange for resupplying Israel’s military. Prices for oil barrels surged, then quadrupled, resulting in a gas shortage.
Market saturation talks about the demand for oil from one region higher than the demand from another region. This would lead to reduced supply for other regions which can swindle the price of oil in those regions. Countries like China had once caused market saturation because of their economic boom which demanded they used a large amount of oil at the beginning of the millennium.
Natural disasters can disrupt crude oil supplies, causing prices to vary. For example, in August 2017, U.S. oil refineries were forced to close in order to be prepared for Hurricane Harvey, resulting in a nearly 10% increase in petrol prices. When pipelines are broken or destroyed, oil delivery is slowed, repairs are required, and prices temporarily rise.
Hurricane Katrina, which hit the Gulf of Mexico in 2005, wreaked havoc on U.S. pipelines and oil platforms along the coast, sending oil prices briefly above $70 per barrel. President Bush used the SPR to assist refineries in resuming operations and lowering prices.
How to keep up with the fundamentals?
The best way to keep up with the happening on the trading table is to read the news, pay attention to the strength of the dollar, and watch out for international relations where both countries produce oil. You can gather such information on oilprofit.IO.
Finding all current data and comparing it to earlier years to see how prices reacted under such conditions may appear to be a demanding process. The purpose is to estimate the future supply and demand scenario. It’ll be nearly impossible to succeed because you’ll be up against specialists with far more data, expertise, and resources.
Always keep an eye for the global events that can influence the price of oil. It is important to the fundamental analysis that would be used to build your trading strategy. Ensure you’re aware of any global issues that will affect the price of oil going forward and also present the ideas of the current state of the market to you.