Oil prices have been hovering in a relatively tight range for the past 2-months as trader’s wrestle with several factors that influence the price of oil. The best way to learn oil trading is to research how others try to tackle these markets and follow the methods that make the most sense. Prices over the long term seem to follow the fundamentals which are driven by supply and demand. Over the short run, market prices seem to be driven by technical analysis.
Oil is Fungible
Oil is a commodity, and is considered fungible. This means that you can take a barrel of oil and transport it and it can be used in a similar manner in different parts of the world. Oil is priced in barrels per U.S. dollar, which means that when the dollar moves higher in value, the price may need to adjust lower to remain the same on other currencies. Oil prices are quoted in dollars per barrel, but are also priced in liters or tons or gallons different parts of the world.
There are several organization that report on the fundamentals of the oil market. The list includes the U.S. Department of Energy, the American Petroleum Institute, the International Energy Agency, along with OPEC.
The main driver of oil prices are the changes in supply and demand. Supply is driven by oil producers located around the world. The Organization of Petroleum Exporting Countries, as a cartel produces the most oil globally, with Saudi Arabia as the number one producer. The United States and Russia, along with Canada and Mexico are also large producers of oil and oil products. The United States is the largest global consumer of oil and oil products.
The Energy Information Administration
Oil a weekly basis, the U.S. Department of Energy releases a report that describe the inventory situation in the United States. The information provided by the statistical arm called the Energy Information Administration, also describes imports and exports along with demand. The weekly petroleum status report is released every Wednesday at 10:30 AM ET, and comes in both PDF and Excel formats. This report is widely viewed and can generate significant volatility. One day earlier, on Tuesday at approximately 4:30 pm ET, the American Petroleum Institute reports their estimate of petroleum inventories. The results of this report are generally different which makes traders hesitant to take positions ahead of the EIA report.
The Department of Energy also writes a short-term energy report which provides their view of supply and demand. There are other organization that also describe both supply and demand for oil. On a monthly basis, the International Energy Agency describes the petroleum environment. This is a Paris based group that is widely read, and their views can be market moving. Additionally, OPEC also releases information and their view of both oil supplies and demand.
While supply and demand help traders determine the long-term changes in oil prices, technical analysis is used by many traders to help guide them for short term movements. Technical analysis is a study where traders look at historical price action to determine future movements. If you combine both technical and fundamental analysis, you can generate your own view of were oil prices are going.