A1 Trading Company

Fundmental analysis guide

How to Trade OIL like a Pro

Fundamental & Price Action Strategy
Focuses of this lesson
In this lesson, we will focus on these three aspects of trading oil:
Fundamental / Macro Drivers
Technical Behaviors
Strategy

How Fundamentals Affect the Price of Oil

Oil is a commodity, or a resource that the world needs in order to function. Because oil is a physical resource, its value relies heavily on supply and demand. When oil is abundant, its value goes down. Whereas, when oil supply is limited, its value increases.

Demand

Global growth & strong economies increase demand for oil
When economies around the world are strong, there is an increased demand for oil. 

Why? When an economy is strong they are more likely to be building infrastructures and exporting goods, which requires more use of oil. 
Global recession & decline can decrease demand for oil.
When the global economy is in a recession, the opposite occurs. During a recessionary period, the use of planes, ships, and cars decreases. Thus, decreasing the use of oil.

Supply

If oil producers increase production, oil prices may decline.
Oil is a commodity that only select areas of the world are able to produce. Therefore, suppliers of oil have real power in the global market. If oil producers increase production, they have the ability to lower the price of oil. 
If oil producers decrease production, oil prices may rise.
Oil producers also have the ability to increase oil prices by limiting production. In 2023, we saw Russia and Saudi Arabia limit their exports of oil which caused oil prices to increase. 
If global supply lines are interrupted, oil prices may rise.
If supply lines are cut for reasons outside of producers decreasing production, oil prices may rise. For example, in 2020 many people were not able to go to work which caused a freeze in the supply line. With a cut in supply line, we see more demand than supply causing prices to inflate. 

Geo-Politicals

Geopolitical risks are factors that can affect the way nations interact with each other. In turn, this can affect trade and the relationship between one country and another or several others. These sorts of conflicts influence market sentiment or even a nation’s GDP. Depending on the type of conflict, certain markets can either suffer or prosper.
Top Oil Producers
Saudi Arabia
Russia
Canada
Iraq
Norway
OPEC
OPEC is a league of nations whose role is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers OPEC.org. This organization can make a major impact on the oil market. 
War's Impact on Oil
Conflicts that involve major oil producers can often have an affect on supply and therefore affect oil's price. 

Speculation

Lastly, speculation or sentiment in the markets can have a significant impact on the price of OIL.
If markets expect a decline in oil demand, price can decline
If markets expect a rise in oil demand, price can rise
central banks & interest rates can greatly impact speculation
If interest rates are rising, it may lead to a higher prob of recession. As we covered earlier, a recessionary period often causes the price of oil to decrease. 

Oil's Technical Behaviors

In the video below, Nick opens the charts to show Oil's technical behaviors.

Oil Trading Strategy

Trend following
When it comes to trading oil, we prefer to follow the trend. Additionally, we prefer to "Rent the space" as opposed to "owning it". In our opinion, oil has a finite time where it controls the world. As more renewable energy sources are being created, oil will likely become less powerful. Therefore, we are not interested in long term investments on oil.  
Trading major events
We look to trade Oil during major events that may affect supply and demand. Some examples of these events are: 
COVID-19 (Bullish)
Wars (Bullish)
Recessions (Bearish)
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There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
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