Oil is the backbone of modern society, and it is one of the most traded products on the market today. However, oil can be a difficult item to trade. This is because oil takes lots of resources and time to produce. Oil is also susceptible to changes in supply and demand from a variety of complex causes. Finally, oil is sold in a variety of different formats. An oil trader needs to understand these three major factors to prosper in the oil market.
1. Understanding Oil Futures
Oil is generally purchased with the promise to deliver a set amount over a period of time. These contracts can be complicated, but they are generally based on the understanding that oil needs to be delivered at a certain date for the agreed upon price. This is called an oil future. Oil futures are the principal financial product of the oil market, and oil traders need to have an intimate knowledge of the many nuances of an oil future. Most traders will simply purchase a future and then sell it for a loss or gain. Another company will handle the process of actually delivering the oil. It is also possible to purchase part of an index. These indexes are part of a future, and an oil trader needs to understand that their index will terminate when the oil is delivered. The basic principal of buying oil futures is to purchase oil that is going to be delivered to a buyer at a higher price. Buyers can also purchase contracts to buy oil that will be lower that the future market price.
2. Predicting Future Prices
Because of the nature of oil futures, knowing future prices is vital to making money from trading oil. The supply of oil can be volatile based upon a number of factors. The supply of oil can increase based upon opening new wells, wells that have suspended production, or by countries deciding to release reserves. The supply of oil can go down because of a long term lack of demand, a disaster that prevents wells from operating, or because of economic sanctions against an oil producing country. Oil supplies can go down as the result of war, civil unrest, or countries not being able to fund oil production. These factors are complex and require an oil trader to understand global political and economic events.
3. Knowing Different Kinds Of Oil
Oil comes in many different forms with it being sold at different prices, and each type of oil is used for a different purpose. This is even true for crude oil that hasn’t been refined yet. One kind of oil is known as bunker fuel. This is sludge like oil used for heating and large cargo ships. This type of oil is dependent upon the severity of winters, global trading patterns, and sanctions against the use of this type of fuel. Light sweet oil is a type of very fluid oil that is refined into many different products ranging from jet fuel to medicines.tradesprime This type of oil usually in demand, but the high price of light sweet oil can result in a trader not being able to make money off of it. An oil trader needs to understand how global events can affect the ability to buy different kinds of oil, and how a buyer may be to switch between different types of oil depending upon price. Oil traders even need to understand the global price of electricity, coal, and natural gas in order to guess the future price of a particular type of oil.