Getting Ahead of the Game: What Determines the Prices of Oil? / Commodities / Crude Oil

Oil is a commodity that plays anindisputable role in the global economy. At the start of the 20th century,the oil industry went into mass production, thus giving birth to what we referto as the modern era of oil consumption. Gradually, coal was starting to take abackseat to it and oil became the world’s #1 fuel source and the undisputedking of commodity trading.

To this very day, this remains unchanged.The only question is, what drives the prices of oil?

1. Supply and demand

Just like everywhere else, supply anddemand is arguably the #1 driving force behind the oil’s prices. When themarket starts thirsting for oil, the prices go up (and vice-versa). In thisspecific case, however, it gets a little bit trickier. This is due to the futurescontract that binds the dealingsbetween both the buyers buyers and the sellers. In other words, when enteringan agreement, both interested parties agree to hold up to their end of thebargain and complete the transaction at the predetermined time and value.

What may appear to be limiting at firstglance, proves to be more than useful for the purpose of safeguarding againstfuture price fluctuations. Coupled with an economic calendar to alert you of major economic releases, this also opens up the doors tospeculative trades if you trust your instinct that’s telling you whether theprices will go up or down in the future. Of course, a major dramatic event canalso influence the market psychology, which could end up driving people to sellout of fear.

2. Sentiment

And so we’ve arrived at another majorprice-determining factor: sentiment. Ever heard of the expression that one’sperception of reality often determines the outcome? A self-fulfilling prophecywould be a good way to describe this phenomenon. When it comes to oil trading,a similar scenario occurs when people decide to snap up the contracts inadvance.

Does the theory hold up in practice?

More often than not, it does. With thatbeing said, there are some notable exceptions to the rule. If we look at thehistory of oil ever since it became the world’s leading commodity in the beginningof the 20th century, there have been major spikes in its value. Thisis a reoccurring pattern that happens every 30-or-so years. However, theunpredictable nature of the global economy only serves to add an extra layer ofcomplexity, which is fabulous for those who enjoy cracking its mysteries.Remember, the market’s key driving factors should be taken more as looseguidelines as opposed to fixed rules.

The issue of cartels

Did you know that one group collectivelyreferred to as OPEC controls as much as 40% of the world’s oil supply? It consists ofthe largest international players coming from Kuwait, Iran, Venezuela, SaudiArabia and others. By joining such a union, it’s possible to reap bigger profitscompared to entering the market individually. Those who are not in it, however,may consider this to be an unethical strategy.

Where to check the prices of oil?

The fastest and easiest way is to head onover to a commodity trading platform and check the prices of oil in real-time.If you’re a complete beginner who prefers to learn the ins and outs ofcommodity trading through practical experience, the good news is that thesetend to feature automated loss protection algorithms. In other words, an effectivesafeguard mechanism that automatically sells the commodity in the event thatprices dip too low.

Conclusion

For those who follow the global trends andwatch the news, combined with a little bit of speculation, oil trading can be alucrative endeavor. Once you learn the ropes, you’ll be able to utilize theknowledge you’ve gained for years to come.

By Dylan M.

© 2020 Copyright Dylan M. - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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