There is an investment product in the market known as the"King of Commodities".Due to its wide application and non-renewable resources,coupled with high volatility and easy grasp of fundamental trends,more and more investors are now receiving it.Start to favor,let's introduce the basic knowledge of beginners to fry crude oil,what homework should be done before investing in crude oil?
What is crude oil investment?
Crude oil is one of the most liquid commodities on the market.Nearly$100 billion worth of oil is traded every day,according to the CME Group,and the commodity is used to power vehicles and machines around the world and is an integral energy source to keep the world running.
This liquidity has also led to increased volatility in the oil futures market,as investors use it as a hedging tool,and in fact in today's trading market,oil prices are one of the main reasons for market volatility.Back in 2015,the collapse in oil prices led to the collapse of the S&P and Dow.
In 2019,oil prices rebounded significantly,and then drove the market upwards.However,in early 2020,a series of factors including Covid-19 pushed prices down again,causing U.S.stocks and other global markets to plummet,so the trend of oil prices The impact on various assets in the market is closely related,and it is worthy of being the"king of commodities".
How to invest in crude oil?
Here are the four key steps you need to follow when trading crude oil
1.Understand the main drivers of oil prices
To be successful in crude oil trading,you need to understand what is affecting it.Of course,as a commodity,oil prices are influenced by supply and demand.An increase in supply leads to a decrease in price,and an increase in demand leads to an increase in price.
Now,oil price volatility is more complex,but the fundamentals are similar.To understand oil supply,you need to know where the oil comes from.Essentially,it mainly comes from OPEC and non-OPEC countries(supply side),while consumption comes from all over the world.The most important crude oil importers are China,the United States,Japan,etc.(demand side).Therefore,any event that threatens oil supply(such as a geopolitical conflict in the region of oil-producing countries)will lead to a shortage of oil,which will lead to higher prices on the supply side.
For example,a few months ago,Saudi Arabia's oil plants were attacked,which many believed would lead to a conflict between Russia and Israel,raising concerns on the supply side and ultimately pushing up prices.
Also here are some factors that will always affect the price:
·Oil inventory data.The U.S.Energy Information Administration(EIA)reports every Wednesday that rising inventories lead to lower prices,and lower inventories lead to higher prices.
Comments from major political figures in the oil sector,such as Saudi or Russian energy ministers.
Comments from key oil professionals such as OPEC.
·Since crude oil is denominated in U.S.dollars,a stronger U.S.dollar will lead to lower oil prices.
·Economic data.For example,the strengthening of the Chinese economy will lead to increased consumption,which in turn increases demand and pushes up oil prices.
·Geopolitical issues.Tight supplies due to military conflict pushed prices higher.
2.Understand market sentiment
The factors described above are purely fundamental in nature.And the oil market,like any other market,not only operates on the basis of fundamentals,but also technical factors play an important role in determining the direction of oil prices.
Traders use technical indicators to determine market sentiment.For example,the Relative Strength Index(RSI)is one of the most commonly used tools for determining oversold or overbought positions.Over the past few months,oversupply concerns have not subsided,but market sentiment has made oil prices continue to rise,with technical indicators suggesting earlier than fundamental turning points.As a trader,you need to have a good understanding of technical trends.
3.Read books about oil
As a trader or investor,reading is one thing you cannot do without.By reading books on crude oil,you can get a good understanding of the historical background of this commodity.It will also help you understand how the commodity works and how the cycle changes.There are many articles on the market that introduce oil investment.Book.
Among them,Jim Rogers'"Hot Commodities"is one of the best books on oil.Rogers,a prominent investment expert,and Soros co-founded the world-renowned Quantum Fund.
Other books you can also read include,for example,Crude Oil Trading and Investing for Beginners by JR Calcaterra and Fundamentals of Energy Futures and Options Trading by Steven Errera.
These books will give you an introduction to the historical background of oil and the different cycles it has gone through so that you can find value in investing.
4.Develop a strategy
This step assumes that you have some K-line analysis skills and a background in trading.You should now start to create your own trading strategy.This strategy should be holistic,that is,you should combine fundamental,technical and sentiment analysis,develop it,and stabilize it after constant testing.The effect is put into use.
Among them,one strategy that can be adopted is to combine WTI and Brent crude oil,Brent crude oil is the world crude oil benchmark,and West Texas Intermediate crude oil is the US crude oil benchmark,the direction of movement of these two"oils"is basically same.Therefore,you can buy and sell these two different commodities at the same time.When one of the varieties starts to fluctuate,you can obtain a part of the profit through arbitrage.This is also the well-known“same market cross-variety arbitrage strategy”in the market.
Crude oil,like the foreign exchange gold market,is a very volatile trading variety,providing traders with sufficient profit margins,but at the same time risks and opportunities always coexist.Before facing the most challenging counterparties,we must Be fully prepared.I hope the above explanations should help you.For more practical collections of crude oil trading,continue to focus on Mutual Markets.com.
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2022-03-22
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