Oil – The Right Commodity to Trade?
Saturday, December 12, 2015, 6:00 AM | Leave Comment
Meta: The perpetual volatility in the oil price makes it one of the best financial assets to trade online. Learn more about trading oil.
Oil is the most used or most sought after commodity around the world.
There are numerous factors that impact the price of oil and this makes its price extremely volatile.
Oil is one of the few financial assets that have wide fluctuations on a daily basis and this offers traders an immense opportunity to profit.
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Understanding Oil Prices
Previously, oil traders usually analyzed two main factors: OPEC and the world economy.
OPEC (Organization of the Petroleum Exporting Companies) usually agrees and sets the amount of oil to be produced by some of the leading exporters in the world.
By setting production limits, the body effectively impacts oil pricing by controlling demand and supply.
Traders also observed the state of the world economy by watching the GDP (gross domestic product) growth rates of the biggest economies, such as the United States.
Oil prices usually rise when the world economy is expected to grow. Over the years, oil prices have been known to correspond with investor expectations on the state of the world economy.
When the outlook is good, oil prices will rise and vice versa.
Recently, though, the United States has become a major influencer of oil prices.
The super power was one of the largest importers of oil a few years back but recently it has emerged as one of the largest producers of the precious commodity.
In the last two years alone, the country has been adding 2.5 million barrels per day of supply to the global market.
Analysts suggest this has been one of the major reasons oil prices have tumbled recently.
Granted, oil remains a finite commodity. There is only a finite amount of oil in the world and conventional wisdom suggests that such commodities tend to rise in value.
However, there are also new oil fields that continue to be discovered which would mean oversupply, thus adding more pressure on the prices of the commodity.
This situation creates an opportunity for speculators who will enjoy the price fluctuations of this commodity.
For this reason, oil remains one of the favorite commodities to trade in markets such as binary options.
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Oil – Current Fundamental Analysis
Last week, oil prices fell back to below $45 a barrel after growing concerns of oversupply in the market.
The US Energy Information Administration (EIA) published the latest reserves data last week which showed that crude oil inventories rose by 4.2 million barrels to 487 million.
The total crude oil inventories are now close to the modern day record high of 490 million barrels reached in April 2015.
The report also confirmed investor oversupply bias by showing that global oil markets were oversupplied by 1.8 million barrels per day in the third quarter of 2015.
OPEC has also not helped with the current bearish price movement of oil in the market.
In their recent meeting, they agreed that they will not cut production and this news also weighed in on the price of oil.
The decision not to cut production means that the current regime of oversupply will continue and oil prices will continue to be pressured downwards.
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Oil Fundamental Outlook
Both OPEC and the US EIA are predicting that oil production in the coming year will fall while demand will increase.
The EIA itself is predicting that oil production in the US will increase by 400,000 barrels next year.
Global oil demand is also expected to rise by 1.4 million barrels per day and this is expected to normalize the market, considering the fact that current oversupply stands at 1.8 million barrels per day.
Still, this balance is likely to be threatened by the Middle East supply.
Saudi Arabia, one of the world’s largest oil producers and exporters, is leading other OPEC countries to continue holding exports at the current high levels.
The idea is to defend or to even gain market share. Saudi Arabia, on its part, insists that it will slowly increase its oil production and export.
Iran is also another factor as most of the economic sanctions placed on it are being lifted.
As a major oil producing nation, Iran will now start supplying its oil on the global market.
These factors are likely to upset any balance that is expected in the market and to continue to fuel volatility.
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Oil Technical Talk
The current price of oil is $44 a barrel. The commodity has been in a solid downtrend for months now.
In late August 2015, the price briefly went below $40 but the levels were rejected by the market and oil posted a mini rally to around $53 in early October.
However, the move lost steam and the downtrend resumed, breaking the temporary support of $45 last week, suggesting that more downward movement can be expected.
Another technical factor that put pressure on the price of oil was the expiration of the December Brent futures which occurred last week.
This brought about decreased liquidity and during such times, the market tends to exaggerate price movements.
All in all, the current oil market seems too oversold and analysts expect a minor price rebound even as the current fundamentals point to a bearish momentum.
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Oil Trading Advice
The current oil fundamentals and technicals hint to a volatile market in the coming weeks.
It is therefore advisable to trade oil in markets that allow investors to make money no matter which direction the price moves.
This means that trading oil binary options on a reputable platform such as Banc De Binary offers investors the chance to make high returns of up to 90% whether the price of this commodity goes up or down.
