How to trade crude oil: a quick guide

Crude oil is often considered one of the most important commodities in the global economy, perhaps because it is a non-renewable resource. This means that it is impossible to naturally replace crude oil at the same rate that it is consumed. If you are beginning to consider trading crude oil for the first time, you should start by understanding what factors drive this limited resource.

Here are some of the main influences that can affect the price of crude oil:

• OPEC+ production and supply policies:  The Organization of the Petroleum Exporting Countries (OPEC+) is an organization made up of 13 oil-exporting nations that enables the co-operation of oil-producing countries in order to influence the global oil market.  OPEC+ member countries must agree on how much oil to produce, which affects the price of oil, as an increased supply means an increase in revenue.

• Supply and demand: The fundamental principle of supply and demand plays a significant role in determining crude oil prices. Increased demand for crude oil (such as when there is a cut in oil supply) immediately creates a rise in the price.

• Geopolitical events: Crude oil prices are usually thrown into the spotlight whenever there are geopolitical conflicts, such as war or an international pandemic. Political tensions and uncertainties between countries add a non-quantifiable risk premium, as refinery disruptions can affect supply and production from OPEC+ producers.

• Economic growth given its impact on global demand: While geopolitical events may have a short-term positive or negative impact, crude ultimately depends on global economic activity to drive demand. In addition, population growth, a rising middle class using more energy and urbanisation are also important factors.

• Inventory levels: A high level of inventories, either from already produced crude oil held in storage on land or at sea, or spare capacity held in the ground by producers, will help make the market less volatile given the ability to mitigate any short-term disruptions, while the opposite may increase price fluctuations.

• Speculation and market risk sentiment:  Like other commodities, crude oil prices can be influenced by investor sentiment and speculative trading in commodity markets. Factors such as geopolitical tensions, trade disputes, and macroeconomic policy decisions can affect investor perceptions and lead to price fluctuations.