Oil Markets In Action: Gaining Traction On Slippery Slopes

Brent crude oil is currently trading around $63.39 per barrel, above the 50-day moving average of $61.16 per barrel, and marginally lower than the 200-day moving average of $64.39 per barrel. These figures, time sensitive though they may be, are reflective of volatility in the oil markets. At any given time, price spikes and sharp declines can occur, throwing a proverbial wrench in the works for oil traders.

WTI crude oil is currently trading around $57.77 per barrel, above 50-day moving average of $55.80, and 200-day moving average of $57.44 per barrel. Clearly, WTI crude oil is in the ascendancy, rallying since October 2019, following a major slump from September highs.

Source: StockCharts Brent Crude Oil and WTI Crude Oil Prices

As one of the most popular commodities to trade, oil markets provide substantial volatility for traders seeking profitable opportunities. Oil futures are contracts where a predetermined amount of oil at a preset price, on a fixed date is traded. Futures markets are used as a stabilization technique to guard against whipsaw activity in oil prices. Another possibility for oil traders is known as an oil option. This confers the right, but not the obligation to trade oil before the set date, at a set price, for a set amount. The raison d'être for oil futures and oil options is simply to better manage trading activity, smooth out volatility, and guarantee pricing regardless of what the market is trading at. 

Speculative Sentiment Driving Oil Markets 

For the most part, speculators and institutional traders are the ones driving the largest oil transactions. However, it is possible to trade oil on an individual basis via CFDs (contracts for difference). For example, oil is being traded for $57.93 per barrel, with lots of bullish momentum behind the current trend. There are many factors which determine the way oil prices are going to move, notable among them the decisions of OPEC member countries.

Rumors have been circulating that the Organization of Petroleum Exporting Countries (OPEC) will extend their production cuts through mid-2020. While slight, the gains in Brent crude oil prices are enough to draw attention from oil traders who are rushing to cash in on the latest uptick. With improving relations expected between the US and China, sentiment for black gold is also increasing. That Russia disapproves of US oil fracking is largely irrelevant, given that markets understand Russia feels threatened by the abundance of oil on the US continent.

For now, it is clear that WTI oil markets are stabilizing beneath the $60 resistance level, while Brent crude oil expectations have also been tempered down as the 200-day expected moving average nears its end. Analysts are looking towards a $65 resistance level, although it seems a way off yet. Many traders are interested in buying on the dip a.k.a. when oil markets retreat and prices drop, fresh money is pumped into these commodities via oil options and futures. CFDs as derivative trading instruments mirror the price performance of these commodities with contracts. 

For the year-to-date, WTI crude oil is up 27.22% at its current level. It started the year on $45.41 per barrel, and reached its peak on April 24, 2019 when it topped out at $66.30. Brent crude oil by contrast is up just 17.83% for the year-to-date. It started the year at $53.80 per barrel, reached a peak of $74.57 on April 24, 2019, and has retreated for much of 2019. Recent gains began only in October, with a sustained period of consolidation taking place.

Factors That Will Impact Oil Markets

Source: Statista Daily Demand for Crude Oil

As the world's most important commodity at this time, crude oil is responsible for the rapid and unprecedented growth of industrial economies across Latin American countries, China and India. As the premier source of energy, petroleum markets are nonrenewable resources and subject to extreme price volatility based on cross currency rates, supply/demand, technological innovation, and geopolitical considerations. Crude oil is imperative in the production of plastics, medicines, and cosmetics. Given its limited supply, oil prices can be expected to continue rising over time until alternative energy sources replace it. 

According to leading statistics portal Statista, the 2019 daily demand for crude oil is 100.3 million barrels, and will rise to 101.6 million barrels in 2020. Barely 10 years ago, in 2009, the demand for crude oil was 84.3 million barrels per day. With unprecedented demand, there is increasing urgency on oil producing nations to meet this quota, failing which the disparity in prices will rise to the detriment of consumers and the satisfaction of bullish oil traders and investors. 

Image by James Armbruster from Pixabay