The Ins and Outs of Trading Oil Futures

 

Hello there, this is tradingpedia.com and this is the last video part of this series discussing the oil market. Oil has an influence on inflation, meaning that it influences the FX market too. We cannot underestimate the true importance of the price of oil.

How Lower Oil Prices Affect Oil-Producing Countries

Lower oil prices trigger monetary policy movements and geopolitical movements across the world. For instance, this is the projection of the percentage change on different countries GDP if oil is $30 in 2020 through 2022. Looks who benefits and who is not.

Oil-producing countries at $30 are affected. Russia with 3% decline, then Saudi Arabia, Mexico, and so on. On the other hand, developed countries will benefit from a lower oil price and stable. It means cheaper oil-related services and the emerging markets benefit the most. This will change if the price of oil is higher, like $75 or more.

This is why oil-producing countries have a hard time keeping the oil underground because you cannot have a much higher oil price. It is not even in the interest of oil-producing countries.

For example, oil at $300 the effect is negative on the economic performance. The oil-importing countries will invest into new technologies and in the end the oil-producing ones will remain with the product unsold. Therefore, even as an oil producer, you need to find a balance between supply and demand, between what the world wants and what you can give, and that balance is the price of oil.

How to Trade Futures

We discussed on a previous video how to trade oil on a CFD product. However, trading oil is mostly done on the futures market.

To trade futures as a derivative product, you need a clearinghouse. This one settles the price for the futures contract on a daily basis.

The problem here is that until April 2020, no one knew that it is possible for a clearinghouse to accept the price of oil below zero. However, the clearing house accepted, and this was the headline on CNBC that made history in April 2020, when the price of oil ended up at -$37.63/barrel. It meant that there was so much oil at oil producers that there was no storage capacity anymore.

The bounce to the current $40 is an advance of $80, but you won’t see it using the services of a regular CFD broker. Instead, you will see the price of oil collapsing to $5 or $6, but in reality, it was way lower. Of course, these are contracts without delivery, so it is very interesting to see why the clearing house accepted it and so on. Anyway, now that a precedent exists, the possibility exists that at one point in time the price of oil slips below zero.

We will end up with the threats to oil and this is an important long-term expectation as there is no planet B yet. It means that the developed world invests massively in ESG programs and considerations. Environmental, Social and Governance aspects are very important concepts for corporations and nowadays many issue green bonds. But we all know that oil as a product is not environmentally friendly, so that is a major threat to the oil industry and by-products as we know them today.

Another threat to oil comes from the financial markets. If there is a precedent in place for negative oil prices on the futures market, then anything is possible.

Conclusion

We will end up with a big thank you for the patience you had so far, and if there are any questions, please feel free to get in contact. To sum up, there is no other product in the history of humankind that changed the world as oil did. Therefore, it is not going to go away and disappear that easily.
Have a great day – bye bye.