How to Analyze and Make Informed Decisions on Crude Oil

how to analyze crude oil

Crude oil is the most important commodity in the world. It is used directly or indirectly by billions of people every day.

According to Statista, the daily demand for crude oil is over 100 million barrels even as the energy transition happens. In this article, we will look at how to trade crude oil and some of the top things to consider.

How to trade crude oil

A common question is how to trade or invest in crude oil. There are several ways to do this. First, unless you are in the United States, the best approach to trade crude oil is to use contracts for difference (CFD). A CFD is a financial asset that lets you bet on the price of oil without the need for holding the real asset.

Second, you can trade oil options or futures. An option is a financial asset that gives you the right but not an obligation to buy an asset within a certain duration, known as the expiry price.

Futures are similar to options, with the only difference being that you have an obligation to buy. There are many brokers that offer futures products.

The other option is to trade oil stocks and exchange-traded funds (ETFs). Some of the most popular oil stocks you can trade are ExxonMobil and Chevron.

The most relevant factors to analyze for crude oil

The News

The first thing you need to do when investing in crude oil is to read the news. This is because of the important role the news plays in the crude oil market. For example, if there is a breaking news about a fire at a major refinery, it means that the supply of crude oil will be limited. This will lead to a higher crude oil price.

Similarly, if there is news that a country like Saudi Arabia is boosting production, it will lead to a lower price. Therefore, before you do anything, you should focus on the previous news.

There are many news events that move crude oil prices. First, oil prices react to OPEC+ decisions. The cartel moves every month to determine whether to cut or add production. In 2023, the price of crude oil jumped after Saudi Arabia decided to cut production.

Second, there is news on geopolitics since some of the top suppliers are some of the most unstable countries. Some of these countries are Iran, Iraq, Saudi Arabia, and Russia. For example, oil prices jumped after the US invaded Iraq and after Russia invaded Ukraine.

Third, monetary policy decisions, especially the Federal Reserve, have an impact on crude oil prices. For example, oil prices tend to do well when the Fed is cutting interest rates.

Learn About Supply

After reading the current news in the oil market, you should start learning about the supply. This is an important factor because like in all financial securities, the demand and supply are very important.

To do this, you first need to know about the biggest producers and whether there are new suppliers. Today, the biggest oil suppliers are the United States, Saudi Arabia, and Russia. Other important crude suppliers are Venezuela and Iran.

These suppliers are mostly divided into OPEC members and non-OPEC members. Therefore, if the OPEC members decide to boost production, it will likely lead to lower prices.

The most important pieces of information that will move market prices are: problems in supply such as a fire, conflicts in major oil exporting countries, and a major deal by oil producers to either slash or boost production.

Look at the Data

Every week, the Department of Energy and the American Petroleum Institute (API) release the inventory numbers. Increasing inventories is usually a sign that supply is increasing while reducing inventories are an indicator of rising oil prices.

The two data points are usually not the same. For example, the API data could show a drawdown while the EIA data could show increased inventories. You should use the data to come up with an interpretation of how you will be trading the two.

Technical Analysis

After looking at the fundamentals, you should now look at the technical analysis. This is where you apply the technical indicators on the charts with the goal of predicting the future movements. The technical indicators are divided into three:

  • Trend indicators are used to show whether a security is trading within a trend
  • Examples are moving averages and Bollinger Bands
  • Oscillators are used to show specific levels

They include the Relative Strength Index (RSI) and the Relative Vigor Index (RVI) They are mostly used to determine whether a security is oversold or overbought. Volume indicators are used to confirm whether a trend is forming. They include volumes and accumulation/distribution.

You should insert these indicators in the chart and predict the price action.

Correlation with other assets

Another way to analyze crude oil is to look at correlations with other assets like stocks and currencies. For example, oil has a close correlation with oil stocks like Exxon and Chevron. These shares rise when oil price is soaring and vice versa.

Also, oil has a positive impact on currencies like the Norwegian krone, Russian ruble, and Saudi Arabia’s riyal. In most cases, these currencies do well when oil prices are rising since the countries generate most of their foreign exchange from oil sales. 

Therefore, one way to take advantage of soaring oil prices is to trade stocks like Exxon, Shell, and BP. 

Energy transition

Another factor that is affecting crude oil prices is the energy transition as more people move to electric vehicles. In theory, this transition should lead to weaker oil demand. 

However, in reality, while the use of EVs is growing, demand for oil remains robust. As shown below, demand has risen quite well after falling during the Covid-19 pandemic.

In the future, however, there is a likelihood that the transition will lead to more volatility in the oil markets. For now, transition news barely moves the market.

Summary

In this article, we have looked at some of the most important things to consider when trading crude oil. Like all commodities, the most important aspect is demand and supply.

Oil will always rise when the market expects supply to fall and vice versa. Therefore, we recommend that you stay on the loop of all new events that could move prices.

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