What News Matters When Trading Oil

Hello there, this is tradingpedia.com and this video deals with a very popular subject – oil or the oil market. Oil is offered by all brokerage houses as nowadays from an FX trading account you can access various markets.

Basically, the brokerage account offers you the possibility to diversify the trading account, to benefit from various correlations, to benefit from hedging using partial or complete hedging, and so on.

This is not the oil price that you see here on the screen, but the USDCAD pair. It is here for a reason and you will see in a moment why.

The Price Of Oil

The Canadian Dollar (CAD) is directly correlated to the price of oil. There are many prices of oil, there is not only one, and this is why you can sometimes read in the financial press that oil prices moved to the upside or downside as there is not only one single price of oil – there is the WTI, the Brent Oil price, and even an OPEC mix price, etc.

I’m not going into more details, but what is important is that the CAD is directly correlated to the price of oil. For instance, if the USDCAD declined from 1.46 to the current 1.3160, one of the main reasons is the higher price of oil. Usually that relationship decreases with higher levels of interest rates in the United States because some of the traders will choose the USD because of the higher yield.

But since March, with the coronavirus crisis, the Fed slashed the rates close to zero. Bank of Canada did the same and there is no interest rate differential anymore between the two. Therefore, the main driver between the two currencies is now the price of oil.

So, if you check the price of oil, the WTI, you will see that this move lower is the equivalent of a move higher in the price of oil. Therefore, what matters for the price of oil?

The Futures Market

First of all, the futures market. Make sure you understand what futures are and how futures are traded, what is the role of a clearinghouse, why contracts expire, what is the purpose of the futures market, and so on.

During the pandemic, this move higher from 1.35 to 1.46 was caused by the oil price falling into negative territory. Up until this 2020, we never knew that oil can settle on a future contract below zero. Well, it did. It was not sure if the clearinghouse would allow it, but it did. At that point in time, as it reached zero and below, oil producers paid for someone to come and pick the oil up as there was no storage room available. To shut down an oil rig or oil producing facility is quite a complicated process, it cannot be done just like that.

The futures contracts have an expiration and in this case there was no demand for these contracts and the price settled at $-40. As a consequence, the USDCAD pair moved to the upside, because of the CAD collapsing together with the price of oil. Therefore, make sure you understand the futures market and how it influences the price of oil and how the price of oil then influences all the other assets.

Supply And Demand

Next, when it comes to trading oil, it is all about supply and demand. It means that you look at inventory levels. The United States is one of the countries that publishes weekly the inventory levels and higher inventory levels means that there is declining demand for oil products in the United States. On the other hand, lower inventory levels signal increased demand for oil products and the price will find bids.

The Oil Rig Counts

Also, still in the United States, focus on the oil rig counts. These are published also around the world. The bigger the number, the bigger the oil quantity that reaches the market and it may have two interpretations. First, it shows strong demand so companies invest in more oil rigs. Second, if this creates an imbalance between supply and demand, it may lead to lower prices. Therefore, make sure you understand how the oil rig count interpretation functions, as it is a major driver for the price of oil.

Organization of Petroleum Exporting Countries

Last but not least, consider the OPEC. Born sixty years ago, the acronym stands for the Organization of Petroleum Exporting Countries. The aim is to control production in such a way to influence the price.

Because these countries’ main resource is oil, they and their population’s welfare depends on the price of oil. Therefore, they all want to see bigger oil prices, but how big is big enough? Because bigger oil prices translate into inflation in the developed world, and then it will not have the power to buy your oil. Therefore, there is another balance to consider for finding out the right price for oi. $-40 was definitely not the right price for oil, as it settled there for the month of April.

What the OPEC did was to meet and form an alliance with nine other oil producing countries, plus Russia, and they cut the production in such a way that the oil remains underground. This was made in time, and the price of oil recovered slowly but surely and we can see that recovery in the USDCAD decline.

The price of oil nowadays trades around $40 from -$40 so a move of more than $80 from negative to positive, mainly due to what OPEC did. So make sure you understand what OPEC stands for, when the meetings take place, and you will understand how the oil market functions.

Thank you for being here and bye bye.