Five ways to make money trading oil
If investors are keen to get the most out of trading oil, they need to be aware of the supply and demand side.
Crude oil has often been described around the world as black gold, and rightly so. Among all commodities like precious metals, agricultural commodities, base metals etc., crude oil is the most volatile and hence most suitable for day-to-day trading. The world economy is highly dependent on its distribution, with the ecosystem filled with competing oil-producing countries and those dependent on its imports. Moreover, trading crude oil on commodity exchanges can be a profit-making exercise, as it is the engine that drives economic growth in both developed and emerging economies.
On the stock market front, it is the volatility of prices, the liquidity of crude oil as a commodity and the various other factors that contribute to the fluctuations, which then affect the price. It is important to understand these factors to know what to expect from trading a commodity like crude oil and making money from it.
Here are some of the ways to make money trading oil:
1) Be active in the market
If investors are keen to get the most out of investing in crude oil, they need to be aware of supply and demand. Production at crude oil plants and demand for the commodity is highly dependent on global economic production and the ability of countries to purchase larger quantities.
For example, if it is carried over, demand usually falls, leading to the shutdown of production facilities and the sale of oil barrels at a much lower price. On the other hand, stable production trends allow for higher bidding. It is important for investors to keep track of these developments around the clock.
2) Having a trading strategy in place
As with stock markets or mutual funds, investments in crude oil futures contracts also have thousands of experts whose job it is to use this commodity market as a hedge against other speculative markets. These are people who have gained the knowledge to read the geopolitical scenarios that take place in the world every day and suggest their impact on commodity prices and their trade.
Therefore, it is important for individuals to have a strategy in place that is not only driven by emotions, as in the case of stock market investments. Using portfolio managers and market advisors is not a bad option, as they will help you understand the energy market ecosystem.
In addition, investors must try to understand the implications of global socio-economic and political trends. For example, if a war-like situation arises in the Middle East, or if oil-producing countries spill over the industry’s hegemony, it could lead to a massive increase in prices or an oversupply of oil barrels.
3) Difference between different types of crude oil
It is important to know the difference in the trading of Brent and West Texas Instrument (WTI) crude oil. One is an offshore produced oil, while the latter is produced inland in the US through fracking. India is an importer of Brent crude oil, and there are other countries that use WTI crude oil.
In terms of price, the previously established convergence between Brent and WTI has started to diverge since the previous decade due to higher WTI production and output compared to offshore Brent. As an investor, if you are interested in betting on both options, it is necessary to know their individual developments.
4) Reading China and India’s economic situation correctly
India and China are one of the largest importers and consumers of crude oil in the world, and their internal economic relationships have global implications.
A slowdown in the domestic economy can affect crude oil prices due to reduced demand and excess supply. Similarly, economic prosperity in these countries leads to higher consumption, which affects higher car sales, industrial use of crude oil and the logistics and supply chain. Therefore, it is important for investors to keep track of domestic developments in crude importing countries to understand their impact on global energy markets.
5) Relying on the trends of institutional investors
In India as well as in other countries, in India or elsewhere, institutional investors, nationalized oil companies, airlines etc. trade hundreds, in some cases thousands of barrels of crude oil. The idea is to use it mainly as a hedging strategy against price fluctuations or future price increases.
The advantage for these large investors is that they would not have to store the large amount of crude oil at their own facilities. It works more like a receipt, where the times of price increase. Oil companies can meet the energy needs of their respective populations, without having to pay extra money when prices rise. By using hedging strategies, ordinary investors can also understand market trends.
In addition to this, institutions also collect resources to make their own discoveries both on and off land. Paying attention to global scenarios can always make investors a lot of money, and if combined with expert advice, investors will earn excess returns from energy markets.
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