Introduction
Crude oil plays a significant role in the global energy sector as a major energy source and a widely-traded commodity. In this comprehensive article, we will delve into the origins and history of crude oil, explore the key factors that influence its price, and discuss the primary reasons why traders engage in oil trading.
What is Crude Oil and What is it Used For?
Crude oil, also known as petroleum, is a natural fossil fuel that serves as the primary energy source on a global scale. It is derived from ancient organic matter and can be distilled into various component fuels, including gasoline, diesel, and lubricants. These refined products find extensive industrial applications across multiple sectors.
The extraction process for crude oil involves drilling into underground reservoirs. As of 2019, the United States, Russia, and Saudi Arabia are the leading contributors to crude oil production worldwide. To gain a deeper understanding of the relationship between crude oil and other energy resources, as well as the trading opportunities they offer, visit our informative Major Commodities page.
Brent and WTI Crude Oil Explained
Crude oil exhibits variations in composition depending on its source. Two types, namely West Texas Intermediate (WTI) and Brent crude, are utilized as benchmarks for global pricing. These benchmark crudes differ in terms of composition, extraction locations, and price dynamics. For a thorough analysis of these benchmark crudes and insights into trading strategies for each of them, refer to our comprehensive WTI vs Brent comparison.
Power Players in the Crude Oil Market
The establishment of the Organization for Petroleum Exporting Countries (OPEC) in 1960 revolutionized the global crude oil market. This organization sets production quotas for its member nations with the goal of minimizing competition and maintaining profitable price levels. Dominated by Kuwait, Qatar, Saudi Arabia (which controls the vital Strait of Hormuz), and the United Arab Emirates, OPEC wields significant influence over global oil supply. Despite this, as of 2019, the United States stands as the world’s largest producer of oil.
In addition to OPEC, international oil companies (IOCs) like ExxonMobil, BP, and Royal Dutch Shell contribute to the global oil supply. These investor-owned corporations function with the objective of enhancing shareholder value through private interests. On the other hand, national oil companies (NOCs) such as Saudi Aramco and Gazprom are either completely or majority-owned by national governments. To gain a more in-depth understanding of these power players and their impact on global oil production, explore our informative guide on 8 Surprising Crude Oil Facts.
History of Crude Oil
The history of crude oil has experienced significant transformations over the years. At the turn of the century, OPEC exerted substantial control over global supply, while US demand primarily drove prices. Consequently, prices soared from $25 per barrel for Brent and $27 per barrel for WTI in March 2001 to a staggering $140 per barrel for both types by June 2008. Such a price surge led to what is known as a price bubble in the market.
However, the past decade witnessed technological advancements and deregulation that facilitated a surge in US shale oil production. This shift in power from OPEC to the US triggered a sharp decline in prices, plummeting to under $36 per barrel for both WTI and Brent by January 2016. OPEC responded to this price decline by collaborating with several countries, including Russia, to implement production quotas aimed at stabilizing prices. As a result, the cost per barrel climbed back up above $70 for Brent and $65 for WTI by April 2018. The accompanying chart illustrates key milestones in the price of US Crude from 2000 to 2019, showcasing the factors influencing these price fluctuations.
What Affects Crude Oil Prices?
The price of crude oil is predominantly influenced by the dynamics of supply and demand. Various factors, such as outages, production cuts implemented by OPEC, seasonal patterns, and changing consumption habits significantly impact these fundamental drivers. To acquire a comprehensive understanding of these factors and their vital role in trading crude oil, consult our comprehensive guide on trading this valuable commodity.
USD and the Price of Oil
Historically, there has been an inverse relationship between the US Dollar and oil prices. A weaker US Dollar has traditionally driven higher oil prices in dollar terms. Due to the US being a net importer of oil for extended periods, an increase in oil prices results in a rise in the US trade balance deficit since more dollars must be sent abroad. It is worth noting, however, that this relationship may exhibit less reliable patterns in modern times.
In contrast, there exists a more predictable correlation between the Canadian Dollar and oil prices. For instance, in 2019, Canada exported around three million barrels of oil and petroleum products daily to the US, generating substantial demand for the Canadian Dollar. Therefore, an increase in US demand for oil often leads to rising oil prices, potentially resulting in a decline in the USD/CAD currency pair. Conversely, reduced US demand for oil may cause oil prices to fall, consequently diminishing the demand for the Canadian Dollar.
Reasons to Trade Crude Oil
The crude oil market offers an array of enticing features, making it an attractive choice for traders. The volatile nature of this asset appeals to swing and day traders who thrive on reacting to the latest oil pricing news. Although trading crude oil carries inherent risks, many individuals perceive the oil market as a pure opportunity for profit.
Furthermore, crude oil boasts high liquidity, allowing traders to enter and exit positions at desired price points with minimal trading costs. Additionally, trading oil can serve as part of a hedging strategy to mitigate the impact of its volatility on other investments. Moreover, incorporating oil trading within a diversified portfolio comprising commodities, stocks, and bonds can further enhance risk management and potential returns.
How to Get Started Trading Crude Oil
For traders seeking comprehensive guidance on trading crude oil, our platform offers an in-depth trading guide packed with valuable insights and strategies. Additionally, we provide daily news and analysis articles, ensuring you stay up-to-date with the latest crude oil prices and market developments. Furthermore, you can download our free quarterly oil forecasts, equipping you with the knowledge necessary to make well-informed trading decisions within the dynamic oil market.