Also, energy sector volatility has risen sharply in recent years, ensuring strong trends that can produce consistent returns for short-term swing trades and long-term timing strategies. In addition, not all energy-focused financial instruments are created equally, with a subset of these securities more likely to produce positive results.
Here are five steps needed to take consistent profits from these turbulent markets. Both professionals and novices will benefit by studying these drivers and adding workflows that measure changes in these structural elements. In particular, pay close attention to volume levels and trend intensity, always trying to identify the current crowd and its emotional state.
Crude oil moves through perceptions of supply and demand , affected by worldwide output, as well as global economic prosperity.
Over-supply and shrinking demand encourage traders to sell crude oil markets to lower ground while rising demand and declining or flat production encourage traders to bid crude oil to higher ground. Price action tends to build narrow trading ranges when crude oil reacts to mixed conditions, with sideways action often persisting for years at a time. Professional traders and hedgers dominate the energy futures markets , with industry players taking positions to offset physical exposure while hedge funds speculate on long and short term direction.
Retail traders and investors exert less influence than more emotional markets, like precious metals or high beta growth stocks. The subsequent waves of greed and fear can intensify underlying trend momentum , contributing to historic climaxes and collapses that print exceptionally high volume. WTI originates in the U. Permian Basin and other local sources while Brent comes more than a dozen fields in the North Atlantic. These varieties contain different sulfur content and API gravity, with lower WTI levels commonly called light sweet crude oil.
Brent has become a better indicator of worldwide pricing in recent years although WTI is now more heavily traded in the world futures markets after two years of Brent volume leadership. Pricing between these grades stayed within a narrow band for years, but that came to an end in when the two markets diverged sharply due to a rapidly changing supply vs. The rise of US oil production, driven by shale and fracking technology, has increased output at the same time that Brent drilling has undergone a rapid decrease.
Those laws are likely to change in coming years, perhaps narrowing the spread between WTI and Brent, but other supply factors could intervene and keep the divergence in place.
The majority of futures traders can focus exclusively on this contract and its many derivatives. Exchange traded funds ETF and exchange-traded notes ETN offer equity access to crude oil, but their mathematical construction generates significant limitations, due to contango and backwardation. It peaked late in the decade and began a tortuous decline, dropping into the teens ahead of the new millennium.
Crude oil entered a new and powerful uptrend in , rising to an all-time high at It then dropped into a massive trading range between that level and the upper 30s, remaining within its boundaries into There are dozens of other energy based products offered through NYMEX, with the vast majority attracting professional speculators but few private traders or investors.
US Oil Fund USO offers the most popular way to play crude oil through equities, posting average daily volume in excess of million shares. This security tracks WTI futures but is vulnerable to contango, due to discrepancies between front month and longer dated contracts that reduce the size of price extensions.
Oil companies and sector funds offer diverse industry exposure, with production, exploration and oil services operations presenting different trends and opportunities. While the majority of companies track general crude oil trends, they can diverge sharply for long periods. These counter swings often occur when equity markets are trending sharply, with rallies or selloffs triggering cross-market correlation that promotes lockstep behavior between diverse sectors.
Reserve currencies offer an excellent way to take long-term crude oil exposure, with the economies of many nations levered closely to their energy resources. Bearish crude oil positions require buying these crosses while bullish positions require selling them short.
Crude oil and energy markets are highly specialized venues, requiring exceptional skill sets to build consistent profits in speculation. Market players looking to trade crude oil futures and its numerous derivatives need to learn what moves the commodity, the nature of the prevailing crowd, the long-term price history and physical variations between different grades.
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Become a day trader. Learn What Moves Crude Oil Crude oil moves through perceptions of supply and demand , affected by worldwide output, as well as global economic prosperity. Understand The Crowd Professional traders and hedgers dominate the energy futures markets , with industry players taking positions to offset physical exposure while hedge funds speculate on long and short term direction. The five largest U. The Bottom Line Crude oil and energy markets are highly specialized venues, requiring exceptional skill sets to build consistent profits in speculation.
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