intro – crude oil:
Crude Oil, also called black gold, is a naturally occurring liquid compound formed under the earth’s surface from organic matter subjected to intense heat and pressure over time. It is refined and separated into it’s constituent components at industrial level refineries. Some of the key components of Crude Oil are petrol, diesel, kerosene, asphalt and other chemicals that are used to make plastics, pesticides and pharmaceuticals.
Since the invention of internal combustion engine, rise in commercial shipping and aviation, Crude Oil has been the energy source that has powered industrialisation of nations throughout the 20th century. Following the collapse of the OPEC-administered pricing system in 1985, oil-exporting countries adopted a market-linked pricing mechanism. It is now the main method for pricing crude oil in international trade. The current reference, or pricing markers are Brent, WTI(West Texas Intermediate) and Dubai/Oman.
a detour back in time
Crude oil has been used since ancient times, in one way or another. More than 4000 years ago, asphalt was used in the construction of the walls and towers of Babylon. Ancient Persian tablets indicate the medicinal and lighting uses of petroleum in the upper levels of their society.
The use of petroleum in ancient China dates back to more than 2000 years ago. One of the earliest Chinese writings cites that oil in its raw state, without refining, was first discovered, extracted, and used in China in the first century BCE. In addition, Chinese were the first to record use of petroleum as fuel in fourth century BCE. They also extracted oil from bamboo-drilled wells.
Crude oil was distilled by Persian chemists, with clear descriptions given in Arabic handbooks. The streets of Baghdad were paved with tar, derived from crude oil that became accessible from natural fields in the region. In the 9th century, oil fields were exploited in the area around modern Baku, Azerbaijan. Marco Polo(13th century) and Arab geographer Abu al-Hasan ‘Alī al-Mas’ūdī (10th century) described these fields.
Through Islamic Spain, distillation became available in Western Europe by the 12th century. Early British explorers to Myanmar documented a flourishing oil extraction industry based in Yenangyaung that, in 1795, had hundreds of hand-dug wells under production.
crude oil trading
Crude Oil spot, futures and other derivatives markets are very liquid. Therefore, price fluctuation in the markets creates opportunities for traders/investors to profit through speculation. In addition, market participants have many options. Such as the spot, futures and options markets. You can also speculate on crude oil price through drilling and refining companies shares, ETF’s or oil index funds.
The top three crude oil producing countries are Russia, Saudi Arabia and the United States. Demand and supply in the market sets the market price. However, geo-political events also influence crude oil price. For instance sanctions, coordinated oversupply in the market from crude oil producing countries, large infrastructure investment or growth projects.
Crude oil is the single most important commodity in the world as it is the primary source of energy production. Heavy reliance on oil is seen as one of the main causes of global warming. A topic that has gained traction in the last 20 years. This will have a major impact on oil market over the new few decades.
variables and factors that impact crude oil price
dollar(USD) rate in fx markets
Firstly, as USD appreciates in value, this causes a drop in demand for crude oil. This is because there is sell side pressure from investors who hold crude oil, to exchange it for now valuable USD. There is a consistent demand for oil from the entire world, so they have willing buyers. However, buy side pressure from new buyers falls. This is because speculators do not want to convert their (non dollar denominated) investments into USD, as they will get less dollars per their domestic currency.
Secondly, higher inflation means depreciation in the value of USD and that implies a rising demand for crude oil. This is because investors will use cheap dollars to buy up more oil/oil futures. Thereby, creating extra buy side pressure. In addition, the current investors will be unwilling to sell their oil futures as they will get less USD. Therefore, higher inflation in the US tends to push up oil prices. In addition, higher oil prices, pushes inflation further up still. Since it’s a key energy source and component in manufacturing industry.
Thirdly, short and medium term interest rates spike will impact the oil price. We should expect the oil price to fall in this scenario. This is because higher rates will mean a (relatively)risk free alternative to oil- a more risky asset. However, longer term high rates will lower bond yields and therefore, the large investors’ money will move to riskier assets, causing oil prices to spike.
variety of crude oil
Fourthly, crude oil trades through two primary markets, West Texas Intermediate Crude and Brent Crude. WTI originates in the U.S. Permian Basin and other local sources while Brent comes from more than a dozen fields in the North Atlantic. These varieties contain different sulfur content and API gravity. Lower sulfur levels is commonly called light sweet crude oil. Brent has become a better indicator of worldwide pricing in recent years.
Pricing between these grades stayed closely coupled for years, but that came to an end in 2010. The two markets diverged sharply due to a rapidly changing supply versus demand environment. U.S. oil production, driven by shale and fracking technology, increased WTI output. At the same time Brent drilling underwent a rapid decrease.
and the rest
Finally, other factors such as sanctions, tariffs or coordinated over/under-production impacts oil price. For instance, if OPEC(Organization of the Petroleum Exporting Countries) decide to cut the production of oil in half, the price will rise. Or if sanctions are imposed on one of the major oil producing countries, this could also lead to a short term spike in oil prices.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this
STOKAI provides daily prediction using algorithms based on all factors that impact Brent Crude Oil price. Then, we evolve this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our friendly customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.