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Investing in Crude Oil

For investors that are interested in investing in Crude oil, we’ve put together this short guide which covers off some of the key factors that affect price.

Crude Oil is the world’s most heavily traded commodity. The volumes of trade in oil that flow daily through commodities exchanges dwarf those for other commodities. This is because buyers and sellers in the market include not only speculators, funds and investors but also oil producers and refiners who use futures to hedge their exposure, that is, cushion themselves from price swings by fixing prices three, six, twelve months or longer in advance. This has led to an efficient market, and is why you will usually find the narrowest spreads for crude oil on the commodities section of your CFD or spread betting platform.

Oil futures are traded on New York Mercantile Exchange (NYMEX), which is the most liquid market for oil futures; the Intercontinental Exchange (ICE), the key oil exchange in Europe; the Shanghai Futures Exchange (SHFE) and the Tokyo Commodities Exchange (TOCOM).

The most sought-after crude oils are those called light and sweet which contain a large amounts of fractions that are used to process petrol, kerosene and diesel. The term sweet comes from the practice in the early days of oil drilling when prospectors used to taste and smell a small amount of oil to determine its quality. “Sweet” oil, or oil with low sulphur content smells pleasant and has a mildly sweet taste.
WTI’s nearest rival, Brent Crude oil, a type of oil from the North Sea traded on ICE in London, has risen fast and has become the key contract the industry will look at when trying to assess what the global price should be. You will often see both Brent and WTI quoted as spread bets or CFD markets.

The quality of crude oil varies from field to field, it is classified depending on how much sulphur it contains and how light or heavy it is. Crude oil is not used in its original form but is refined into products such as gasoline and kerosene, a fuel for planes, and distillates such as diesel and heating oil used to either power buses, trains and machinery or to heat building and fire industrial boilers.

West Texas Intermediate is the most popular futures contract traded on NYMEX with 170 million lots traded in 2010. Until recently WTI was considered the benchmark contract for the oil industry but in recent years the price for WTI has dropped even at times when oil supplies around the globe have been tight because WTI reflects the regional US storage and transportation dynamic rather than that of the rest of the world.
The price of oil is a balancing act between demand and supply issues. On the supply side oil depends on global politics more than any other commodity. Though the single largest producing country is Russia, most of the oil is produced in the Middle East and any conflicts and unrest there will be reflected in a rise in prices.

Saudi Arabia is the largest producer in OPEC. Its other key members are Algeria, Iran, Iraq, Kuwait, Libya, United Arab Emirates, Qatar and Venezuela. OPEC ministers meet twice a year in March and September.

Apart from geopolitical news there is a whole set of data that will move oil prices on a regular basis. The US Department of Energy’s Energy Information Agency (EIA) publishes weekly levels of US oil, gasoline, diesel and heating oil inventories. Oil analysts will publish their forecasts for changes in inventory levels a day before the data release, and oil prices will move depending on how close the actual change was to the predictions. Any forecasts from OPEC ministers on predicted oil output will move prices, as will statements from the International Energy Agency, a group representing 28 key oil consuming countries, which holds significant oil stockpiles and which it very occasionally releases in order to alleviate a shortage in the market.

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