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.
How to analyze the price of oil online?
A relevant analysis of the online price of a barrel of oil is made with a good choice of graphs. Only real time charts will allow you in fact to spot the decisive movements and their strength, or their volatility. Depending on your type of trading, you will choose charts of minutes, hours even maybe days according to your preference, for a day trading, or Japanese candlestick charts.
Feel free to monitor the level of support and resistance and their positioning relative to the online price of oil at a given time.
The fundamental analysis of oil’s online price:
Now that you master the technical analysis of the online price of oil, you don’t have to forget that the price of this raw energetic material is also influenced by other fundamental factors.
In order to add them to your analysis, do not hesitate to consult along with the charts, a reliable economic calendar that is updated in real time.
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.
The different types of oil and their prices
Among the most traded raw materials, there is the barril of crude oil which is one of the favorite stocks of online traders. On the stock market, you can use CFDs to speculate on the two different types of oil namely: the Brent oil and the WTI.
Brent oil is a sort of oil that comes mainly from the North Sea and is listed on the London stock Exchange. It is a crude oil which is a reference in the European market. This oil contains about 0.37% crude sulfur which makes it more difficult to refine than WTI oil. Even if this oil is produced in Europe, it is also a reference in the rest of the world because it influences the price of almost two thirds of the world’s production.
The WTI or the West Texas intermediate oil, is produced in the United States, mainly in Texas. It contains 0.24% of sulfur and is therefore easier to refine than Brent. The WTI is listed on the New York NYMEX market. It is however less present on the international market and is especially sold in the United States or in North America.
Price of Brent crude oil:
Brent oil is a reference on the oil market, the same way than the WTI oil. Of course, its ranking meets specific criteria and is done on a different stock market. We invite you, to read this article, and find out more about this oil and its price. You will of course find here its online price, but also explanations about this kind of oil and an analysis history about the price of this raw material over the last 10 years. All the information that you will need to carry out a relevant analysis of this raw material in the stock market will then be within your reach.
About Brent Oil:
Brent oil is an oil extracted from deposits located in the North Sea. It is lighter than other oils and has a lower level of sulfur. It is normally more expensive than the others, it is a reference that serves to calculate the value of two thirds of the world’s oil.
The price of a barrel of Brent oil is listed on the London market of the Stock Exchange. Its quotation is done by comparing supply and demand around the world. This criteria stem from several factors such as the global energy policy and the economic health of countries that import it, it is quite easy to predict its evolution on the short and long term.
Historical Analysis about the price of Brent oil:
The technical analysis of Brent oil’s historical stock charts is relatively interesting because it demonstrates how this asset can be volatile and therefore interesting for online trading.
In fact, over the course of the last ten years, this asset has experienced several successive and punctual trends. The first uptrend allowed the price of Brent to reach the highest price of its history to 146.08 dollars in July 2008, before having a strong fall in a very sharp downward counter-current. Thus, it decreased to 40.15 dollars in December of the same year.
Gradually, the price of Brent oil has been able to recuperate and has followed an upward trend until reaching the level of 126.65 in 2011, then it experienced a long period of stability until June 2014. But just like the WTI, it then dropped to 46.68 dollars in January 2015, but it seems to be regaining the lost points.
Our predictions about the future evolution of the price of Brent oil:
According to analysts specialized on the oil market, the current crisis, which has made the price of a barrel of oil fall during the last months, should quickly give place to a new bullish period.
It is therefore wise to take a long position on this asset of raw material markets, while taking advantage of its movements in the short term.
WTI (West Texas Intermediate) price
Considered as a reference for the price of oil, it is interesting to follow the price of the WTI for all traders of energy raw materials. So we are going to focus here more specifically on this asset by taking a moment to find out its exact definition, the principle of its quotation and of course the history of its price over the last ten years.
What is the WTI or West Texas Intermediate?
We call WTI or West Texas Intermediate, to a type of crude oil also called Texas Light Sweet. This crude oil is particularly important on the financial markets because it is a reference for setting the price of crude oil for future contracts. It is therefore used as a reference, just as the Brent oil from the North Sea.
Physically speaking, WTI oil is lighter than Brent oil and contains 0.24% sulfur. It is refined in the United States in the Midwest.
The principle of quotation of the WTI or West Texas Intermediate:
The price of WTI crude oil and its history are published and updated live by the US department of energy.
In the past, the price of WTI crude oil was systematically higher than that of the Brent by one dollar and by 2 dollars at the OPEP (Organization of petroleum exporting countries). This is due to the fact that being lighter, the WTI is easier to refine. But today, this rule is not applicable any more. Today, the price of the barrel of WTI is essentially the result of the amount of demand on the countries that import it, compared to US production and to the already existing stocks.
History of the price of the WTI or West Texas Intermediate:
Here is a summary of the historical events that have marked the price of WTI:
The first time that the price of the barrel of WTI went below that of the barrel of Brent, in 2008, it was a difference of almost 4 dollars. Another similar decline was observed in 2010 with 10 dollars of negative difference in April, and then 20 dollars of difference in August of the same year. The record was reached in September of 2011, date in which the barrel of WTI costed 26.80 dollars less that a barrel of Brent.
This significant decrease in the value of WTI on the stock market charts is easily explained by the fundamental analysis, since we can observe that during this period there was an increase of oil stocks in the United States. However, demand was limited geographically by the difficulty in the transportation of crude oil, the demand was not able to keep at pace with supply.
However, the predictions of an increase in the price of WTI are currently very significant and it is therefore the best moment to invest in this asset.
How to interpret the value of oil and its live price?
Oil is listed on the stock market in dollars per barrel. However, we differentiate the barrel of WTI from the barrel of Brent. The WTI or west texas Intermediate is currently the oil of reference in the United States. Therefore, its value is used to fix the price of oil on the NYMEX market.
Concerning the Brent, it is an oil from the North Sea. Its value allows the fixing of nearly 60% of the oil traded on the stock market. On traditional trading platforms, you will have access to both types of oil.
But the value of oil is also determined by its particular status on the market of raw material since it is an energy widely used as a good of consumption for fuel or by industries. Its production comes mainly from the OPEP countries or Organization of Petroleum Exporting Countries. The OPEP’s objective is in fact to regulate oil price and course by influencing specially the quotes of production. That avoids soaring prices in case of under production or a decrease in prices in the case of an excessive production.
Should you invest on the course of action of oil when its going up or down?
If you are planning to invest on the course of a barrel of oil and you do not know yet which strategy you should adopt, you should know that you will only have the hard task of choosing this asset. Since it is highly volatile, the price of oil adapts in fact as good to short term and long-term strategies.
Investing when oil price is going up is wise if you want to adopt a long-term strategy. In fact, since a strong decrease in price in 2016, the barrel of oil represents an interesting background investment since all analyst specialized on this market agree that its price should strongly go up in the following years. Just think about covering your losses with enough capital.
However, short term strategies enable you to speculate on the rise or fall in this asset price. In fact, you simply need to use the fundamental data that we previously mentioned which directly influences the oil price for trading on the rise or on the fall. Here it is necessary to be particularly attentive and take position at the right time by anticipating the early positions taken by investors. In this way and thanks to a significant leverage effect, you could make fast and comfortable profit by surfing on the fluctuations of black gold.
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.