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How to take position on the oil price ?

A good understanding of the oil market and how it operates is the basis for all investment in crude oil. To assist you in mastering the basics of this market we will explain its structure to you in detail, and look at the price movements over the last few years. In this way you will understand how the oil barrel price is fixed and how to take position on this asset by anticipating the future price variations.

The structure of the oil market:

The oil market depends primarily on the Spot market where the physical trades in oil take place, this means in the form of barrels of crude oil. This Spot market is the place where sales and purchases of crude oil take place between the petroleum companies (sellers) and the refineries (buyers) from around the world.

The oil on the stock markets, that means the oil you can take position on as an individual, is quoted on two distinct markets, the NYMEX (New York Mercantile Exchange) in New York, and the ICE Futures Europe (the Intercontinental Exchange) situated in London. These two markets function on a continuous basis, 24 hours a day, and the price per barrel of crude oil is updated in real time according to the positions taken by investors.

To summarise, the more buying positions there are compared with selling positions, so the higher the price per barrel of oil rises. Also, to the contrary, when there are more sellers than buyers, the price per barrel of oil will fall.

It is possible to take position on the oil market using investment tools such as CFDs, both available through the online brokers.


Movements in the oil market:

Now that you know how the oil market is structured and what a quotation for a barrel of oil represents, we will now look at the past and future price movements.

In the past, oil was considered as a choice investment as it responded to a growing demand, notably due to the development of economic activity in certain emerging countries such as China and India. But after rising strongly, the price per barrel suddenly returned to a low in the beginning of 2015 due to an oversupply of the producing countries.


Where is the price per barrel of oil quoted?

It is on the Spot market that physical oil in the form of barrels is traded. It is the petroleum companies and refiners that proceed with these trades amongst themselves. Of course, the crude oil is quoted continuously, 24/24, on major financial markets at the New York Mercantile Exchange or NYMEX, and the Intercontinental Exchange in London or ICE.

On these two markets, the oil is not traded in its physical form but ‘on order’, contrary to the Spot market.

The oil barrel price changes therefore in real time according to the positions taken by traders. The reference price generally used in Europe is that of Brent, the European crude oil. This price is different to that of WTI or Dubai Light, both of which you can also trade on the online trading platforms.


The factors that influence the price of oil

The price of oil varies according to different factors, particularly that of the difference between supply and demand.

The oil supply: This depends on the petroleum companies that operate the oil fields, namely OPEC (the Organisation of Petroleum Exporting Countries) which sets production quotas for its members and includes Saudi Arabia, Iraq, Iran, Kuwait, Venezuela, Algeria, Angola, Libya, Nigeria, the United Arab Emirates, Qatar and Ecuador. The oil supply tends to increase with the discovery of new crude oil deposits and the production of shale gas.

The oil demand: This corresponds to the oil consumption on an international level.

Other factors can equally influence movements in the oil barrel price such as accidents that may occur on the production sites, financial crises, military conflicts in the production areas and also worldwide geopolitical events. It should be noted that the oil barrel price is quoted in U.S. Dollars so movements in the value of this currency can exert a strong influence of oil prices.


Why have oil prices followed a falling trend?

Although oil enabled numerous investors to make substantial profits due to an almost continuous rising trend, the price of crude oil has been falling since summer 2014 and continues to be a cause of worry for the markets. But what led to this falling trend?

Everything started with an increase in oil production from the OPEC countries who refused to reduce this in order to control the situation. Due to this refusal, the oil stocks accumulated, thus the demand weakened proportionately, which has inevitably led to a fall in the price. 

The worldwide demand for oil has also greatly decreased, largely due to a contraction in the economic growth in 2014. This global growth only experienced + 3.3% and the estimate for 2015 by the IMF is not joyful with a rise of only 3.5%. Due to this slowdown of activity, energy needs are automatically lessened.


How to make a short term forecast on the price of oil?

Let us first look at the methods that enable you to anticipate the short term movements of the oil price.

If you can trade only dedicate a few hours per day to oil trading using CFDs with a Forex broker, you should keep an eye on the short term movements of oil. It is therefore the micro-movements that you will find most useful. To anticipate these micro-movements you will mainly use chart analysis by studying and analysing the following indicators:

  • The trends:  Trading inside a strong trend is definitely the best way of speculation on oil. If you observe a strong and long lasting trend then it is highly likely to continue over the short term.
  • The support and resistance levels: A technical support level is the lowest level attained by a trend within a given time period. When the support level is overtaken on a fall this indicates a continuance of the falling trend. And to the contrary, if it is not overtaken this indicates a return to a rising trend.  The resistance level however corresponds to the highest level attained during the same time period. If it is overtaken then the rising trend will continue and in the case to the contrary then it will return to a fall.

There are other, more complex, technical indicators that enable forecasts over the short term on the price of oil, such as moving averages, but we will not study those in this article.


How to make a long term forecast on the price of oil?

Let us now look at the movements of oil over the longer term which will enable you to take long positions using CFDs. To make a long term forecast on the price of oil, we tend to favour fundamental analysis. This method consists of analysing the events that can influence a rise or fall of the price such as:

  • The movements of the American Dollar.
  • The OPEC production and quotas.
  • The publishing of the figures for American oil stocks.
  • The geo-political conflicts that affect the producing countries.
  • The global economic health.


Probable movements of the oil price over the medium and long term:

Although the price of oil has strongly dropped over the last few months, the market analysts are fairly reassuring and even relatively optimistic concerning the forecasts over the long term. In fact, this low price period will probably last for a few months before starting a progressive rise towards 70 Dollars per barrel, but without reaching the $100 level it achieved before.

This recovery is expected due to a gradual upturn in demand because of a gradual rise in the economic activity with the majority of importing countries, notably due to numerous investments. On the other hand, crude oil production should progressively diminish thereby favouring a new upturn in the price.


The drop in the oil price should continue during 2016:

The first observation made by the oil market analysts concerns the apparent continuation of the current fall during 2016. The crude oil supply figures should in fact again show an excess during this year due to a rise in Iran’s production which continues to cause a drop in the price of oil given that the demand is less strong than initially forecast.

The lifting of economic sanctions that has affected Iran since the nuclear agreement means that international oil production should in fact increase further by nearly 300,000 barrels per day before the second quarter.

We anticipate a rising recovery due to a drop in the OPEC production at the beginning of the year, but this new data reinforces the worries of the International Energy Agency regarding a continuation of the drop in price. Let us remember that the price per barrel has nearly halved since 2014, which represents a historical low in this market that has experienced an overall rising trend over the last few years.


A long term recovery announced:

Investors looking for a long term oil strategy may feel reassured as a rising recovery is envisaged over the coming years. In fact, all the market specialists are agreed that the current drop in the price should usher in a speculative rush over the next few months reaching a highpoint in 2017.

It is therefore judicious to take position right now on the price per barrel of oil, or wait for a greater fall in the price to do so, thereby profiting from a future rise in the price. In fact, according to OPEC, the price per barrel could increase by an average of 5% per year between now and 2020, therefore attaining 80 U.S. Dollars per barrel at this rate. It could be said that this perspective is extremely attractive for individual traders as it represents a plus value of nearly 41% over only 4 years.

If you decide to take position by purchasing right now, do make sure that you also position stop orders to ensure you do not lose your investment capital in the case of an unexpected major drop in the price of crude oil before the expected recovery.

How to take position on the oil trend:

To taking position on the rising or falling trend in oil you simply need to use a CFD. For this you should create your online trading account now.