Investing in Oil - 6 Things You Need to Know!
In this article you will learn:
why is oil the # 1 commodity
what does the price of oil depend on
what publications are relevant to the oil market
what is the difference between Brent and WTI crude oil
how to invest in this market in XTB
Why is oil the number 1 commodity?
Crude oil is considered the number 1 resource in the world, mainly due to the fact that it is used to produce liquid fuels, which are used to drive means of transport from water, through land to air. It is also used for the production of lubricants, paraffin, asphalt, mazout, therefore it is used for machine maintenance, road construction and as a source of thermal energy and electricity. Moreover, crude oil is used to obtain many synthetic materials.
However, the most important use of oil is energy. Currently, it accounts for about 1/3 of the world's energy supply. In addition, crude oil is the most traded commodity in the world.
Source: IEA World Energy Balance Review 2019
What does the price of oil depend on?
Crude oil as a raw material reacts to the greatest extent to changes related to fundamental factors, mainly in the form of demand and supply. The difference between supply and demand leads to the appearance or contraction of inventories. In this case, the old market rule works, which says that if there is a lot of raw material in the market, the price is low. On the other hand, if there is a shortage of this raw material, the price can rise significantly.
The oil market is very balanced, and excess or shortage usually accounts for a small (up to 1-2%) part of the supply. In addition, demand is not flexible in terms of price, figuratively speaking, we usually refuel the car anyway, regardless of the price at the station. Usually, therefore, it is changes in supply that lead to short-term price fluctuations. A long time passes from the moment of exploration and execution of the first well to continuous production, so production may not always quickly adapt to the needs of the market. On the other hand, if for some reason some production is shut down (e.g. by strikes or political unrest), the price can react strongly. It is not without significance that a large part of the production takes place in regions with limited geopolitical stability.
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What reports should you look for?
In the oil market, there are a few key reports to watch out for. They are published for different periods at different intervals. Therefore, those that are published frequently and cover a short period of time have the greatest impact on the current price movement.
Stock Change - The Crude Oil Stocks Report is released weekly (typically every Wednesday at 4:30 PM EST) in the United States by the US Department of Energy (DoE).
It presents:
- change in US crude oil stocks
- Stock change in Cushing, the settlement site for WTI crude oil
- Stock change of other petroleum products, estimation of production in the USA, implied demand for oil and other products.
Importantly, this is a weekly report, and therefore has a very large impact on the oil market. US crude oil stocks account for the vast majority of OECD stocks, therefore the DoE report has the greatest impact on price developments in the short term. The day before (on Tuesday at 22:30), the inventory change report according to API, the American Institute of Fuels, is published. In this case, producers and other market participants are free to report on their inventory status. It can show what to expect from the DoE report. Data from both reports are available in the economic calendar on the xStation trading platform.
Balance sheet reports - refer to a period longer than one week. These are mainly reports from OPEC, IEA, EIA and also private market participants, such as Bloomberg, which provides production estimates for the largest producers at the turn of each month. The above reports are monthly, quarterly or annual and show how supply and demand have changed. They also present forecasts for future periods.
Change in the number of drilling rigs - this report is crucial, above all, for the United States. Nowadays, the vast majority of production in the USA comes from shale, and maintaining production in the USA requires continuous changes of wells. A large number of active towers means large investments in the oil market and bodes well for greater production. The number of active drilling rigs largely depends on the price developments in the market. It is usually published on Friday afternoon. Data from this report are available in the economic calendar on the xStation trading platform.
COT / CFTF report - investors and market participants in futures contracts are required to provide information on the number of their positions in the crude oil market. CFTC report for largerThe bones of the US markets are published every Friday at 21:30. The ICE report is published on Monday.
They concern the balance of positions in contracts as of the preceding Tuesday. Thanks to the information on the number of short and long positions and their difference, you can determine the moods in the market. Important: The COT indicator is available on the xStation trading platform.
Why do investors choose to trade with oil?
Oil is the most important commodity globally and is often treated as a barometer of the economy. In addition, the importance of this market makes trading smooth and continuous, transactions can be made from Monday to Friday almost 24 hours a day, which is also important in the context of transaction costs. The price of crude oil, like stock indices, can reflect economic prosperity, but since current supply and demand are more important in this case, the relationship is not always strong. It also makes some investors choose oil as a market that reflects the current situation rather than expectations.
What are the main differences between Brent crude oil and WTI crude oil?
In the crude oil market, two crude oil benchmarks are most often discussed: Brent and WTI. Nevertheless, there are more types of crude oil, depending on its properties or where it is extracted. The price also depends on its properties, place of occurrence or transport.
Crude oil benchmarks. Source: Intercontinental Exchange (ICE)
Brent oil - comes from 15 oil fields located in the North Sea. The low sulfur content of less than 0.37% indicates that it is a sweet crude oil, and its low density allows it to be described as light, ideally suited for the production of diesel and gasoline. It is estimated that nearly 70% of global oil transactions are made on Brent crude oil. Brent crude oil futures are traded on the London Intercontinental Exchange (ICE).
WTI crude oil - or West Texas Intermediate, is mined in the United States, in the state of Texas. Due to the sulfur content below 0.24%, it is referred to as sweet and light crude oil because it has a low density. WTI crude oil is the underlying instrument for futures contracts on the New York Mercantile Exchange (NYMEX). It is characterized by high quality, one of the highest in the world.
The difference in value between Brent crude oil and WTI crude oil, i.e. differential, speaks in favor of WTI crude oil, which has better density and sulfur content parameters.
How can you invest in oil with XTB?
The easiest way to invest in oil is to trade CFD OIL or CFD OIL.WTI. CFDs, i.e. contracts for differences on raw materials, incl. crude oil are an extremely interesting instrument, having many interesting features that make this product unique:
are derivative instruments whose price is based on the price of the underlying instrument,
are leveraged,
allow you to invest in both price increases and decreases.
The ability to take long positions (buy orders) or short positions (sell orders) in combination with the use of the financial leverage mechanism makes these types of contracts one of the most flexible and popular types of trading on financial markets.
XTB offers investments in CFDs on Brent crude oil (OIL) and CFDs on WTI crude oil (OIL.WTI), i.e. instruments whose price is based on the current prices of Brent and WTI crude oil, respectively, listed on the organized market.
The xStation trading system, being a complete trading tool, additionally gives the possibility of quick and easy securing of transactions, which, especially when investing in instruments with leverage, is a necessary element to use. In xStation, thanks to the calculator built into the order window, you can set a Stop Loss or Take Profit order in several ways in accordance with the assumptions resulting from your own investment strategy.
Source: xStation
To start investing in the oil market, it is enough to open an investment account. The process of opening an account in XTB is completely online and takes several minutes. In order to check the xStation trading system and test your own investment strategy, it is worth opening a free demo account with virtual funds.
Access to the transaction system is possible through a browser, desktop version and a mobile application, thanks to which you can quickly and easily control your transactions from anywhere from all devices in Android and iOS.
What else should you remember?
At XTB, CFDs are based on exchange-traded futures contracts that expire each month. XTB offers CFDs with a 365-day expiry period (not applicable to CFDs based on shares and ETFs) so that our clients do not have to close a position based on an expiring contract series every month and open another. In this way, customers can continuously, for up to 365 days, hold onone CFD based on the price of oil, without the need to open new positions every month, as is the case in the underlying market. Typically, the transition to the next series of contracts occurs several days before the expiry date of the current series of futures contracts in the underlying market. We inform about the upcoming rollovers in the trade news.
Summary
Crude oil will be a strategic energy resource for a long time to come. The relationship between supply and demand can have a huge impact on the price. In the case of the oil market, it is extremely important to follow the publication of important reports that may increase volatility. Crude oil CFDs available in XTB offer additional opportunities to look for interesting investment situations, both when the price of this commodity is rising and when it is falling. The situation on the financial markets will be related to the oil market for a long time to come.