There are a number of investors who consider crude oil to be in a league of its own when it comes to trading opportunities, mainly because it is a commodity which offers a decent level of liquidity and the potential for profit in virtually all market conditions.
If you want to keep tabs on oil prices, see Money Morning for more details. If you are a fledgling investor who is new to crude oil trading or someone who has already trade crude oil in some way, it still pays to learn or remind yourself of the essential rules of engagement, so that you can give yourself the best opportunity to generate some profits.
Supply and demand
Understanding what influences movements in the price of crude oil will help you to identify how you can place trades that give you the best chance of taking advantage of these fluctuations.
It is often the case that traders who don’t either appreciate or simply haven’t managed to learn the fundamental characteristics that characterize crude oil markets, tend to miss out on the chance to make the most of fluctuations in prices, simply because they don’t understand exactly what is moving the crude oil price and therefore miss certain opportunities.
The most basic driver is quite simply, supply and demand.
Crude oil prices are primarily driven by perceptions relating to supply and demand. Whether it is a fear relating to global output figures, economic uncertainty or even times of global prosperity, these are all scenarios that have the capacity to drive crude oil prices in either direction.
Oversupply and a perceived lack of demand for crude oil are conditions that are likely to send the crude oil price down to a lower level, but a combination of rising demand and news of declining or flat oil production figures, creates almost the perfect storm for driving oil prices higher.
Who you are sharing the market with
It is definitely also worth remembering who you are sharing crude oil markets with and understanding how this particular crowd are going to behave.
If you are playing energy futures markets, it should be noted that professional traders and hedge funds are active players in this sphere. Traders will be looking to take positions that allow them the chance to offset any physical exposure that they might have, while hedge funds are likely to be interested in speculating on which direction crude oil prices are headed in the short and long term.
It is definitely highly relevant to appreciate the profile of the majority of the crowd who are active in this sector and their professionalism. Some markets are more evenly spread with small individual investors and retail investors, which means that emotions can play a greater part in generating some price fluctuations that are driven by greed and fear rather than by players who are operating at a higher level in terms of in-depth knowledge and experience.
Crude oil markets can also be influenced by retail investors, but this tends to happen more when there are sharp trends in play, rather than as a matter of course.
Playing the long game
There is no question that crude oil prices have the capacity to display enough short term volatility to attract traders who are looking to bank some quick profits by taking advantage of these peaks and troughs, but to get a good handle on crude oil markets, it often pays to read the long term chart.
Using charting software to analyze trends is well worth doing, as it helps you to identify trends to support any theories that you might have or want to verify. Technical analysis overlays in some of the software available, will help to make comparisons and read data in a way that should help you to make a more informed decision.
If you look at the long chart for crude oil for example, you can quickly see exactly what influence on prices major events have had, and for how long. The price of crude oil hit a new high in 2008, but we all know what happened to financial markets in that year and the fallout from the global financial crisis has seen crude oil suffer a spectacular fall from that peak point.
Whether you are interested in oil futures or crude oil stocks, if you remember and remind yourself of the essentials, it should help you to improve your chances of success and enjoy some consistent profits, if you get your timing and strategies right.
Alisha Dyer writes about trading and investments. She works in the field of investment banking and writes for a variety of finance websites in her spare time.