It’s no surprise that oil is dubbed “black gold” by traders. It is the most watched and most traded commodity by some margin and a prime example of the ripple effect economic levers of supply and demand can have when they intersect with geopolitical events. Trading opportunities become almost bottomless. Oil therefore carries a significant weight in the global markets and holds a prominent spot in many trading portfolios.
However, the complexities that stem from trading oil can appear daunting for many. And while traders should always practice a healthy mix of both fundamental and technical analysis, oil depends on economic events more than almost any other financial asset. The ability to anticipate and respond to how these economic events impact oil prices is crucial if you want to be in a good position to make a profit. It’s also important to remember that these economic events can either be periodical or irregular, so remaining vigilant is essential.
This article explores three key economic events that oil traders should monitor closely. But first, a quick refresher of the two most-traded oil benchmarks: Brent Crude Oil and West Texas Intermediate (WTI) Oil.
Brent Crude, sourced from the North Sea, is a global benchmark for oil prices and tends to reflect a global price marker. It’s considered a reliable barometer for geopolitical events, given its direct link to regions like the Middle East and Russia, making it a fascinating watch for traders seeking to capitalize on global trends.
On the other hand, WTI, sourced from the U.S., is the principal oil benchmark for North America. WTI often reacts more significantly to domestic events, including U.S. oil inventory reports, opening exciting opportunities for traders focused on the U.S. market.
Three Economic Events Oil Traders Should Pay Attention To
Published weekly by the American Petroleum Institute (API) and the Energy Information Administration (EIA), these reports offer a detailed snapshot of U.S. crude oil stockpiles. They represent an integral part of the WTI oil trading landscape, offering traders vital clues about the oil market’s supply-demand dynamics and hints at future price trends. One of the most memorable examples is from April 2020, when the pandemic drastically reduced demand and U.S. inventories rose to a record high, leading to a historic plunge in WTI prices.
Therefore, a sudden rise in inventories, signaling oversupply or weak demand, often leads to a decline in oil prices as traders anticipate a market glut. Conversely, a significant drop in inventory levels suggests either a rise in demand or a supply shortage, prompting a hike in oil prices as traders brace for a potential supply crunch.
The Organization of Petroleum Exporting Countries (OPEC) is a consortium of 13 nations that represent nearly half of global oil production and over 80% of the world’s “proven” oil reserves. As such, the decisions made during OPEC meetings can have profound effects on the global oil market, making these gatherings closely watched events for oil traders. Especially Brent Crude Oil traders.
OPEC holds regular bi-annual meetings where member countries discuss a range of issues, including production levels, which is the most influential topic on oil prices. If OPEC decides to cut production, it essentially takes oil off the global market, making it scarcer, thereby potentially driving prices up. If OPEC increases production, the opposite occurs.
A recent example of this was in April 2023, when OPEC+ (which includes the 13 OPEC members plus 11 other non-OPEC members) announced it was cutting output by 1.16 million barrels per day. Oil prices skyrocketed to their biggest gain in nearly a year.
Apart from these regular meetings, extraordinary OPEC meetings add an element of unpredictability to the market. For example, in response to the plummeting oil prices during the early months of the COVID-19 pandemic, an emergency OPEC meeting led to a historic production cut agreement, triggering a rebound in oil prices.
Essentially, the decisions made during OPEC meetings can greatly sway oil prices and volatility.
Given its status as a global commodity, the price of oil is highly susceptible to geopolitical events, which can cause significant volatility, whether you’re trading WTI or Brent. Disturbances in oil-rich regions like the Middle East, Africa, or Russia, due to conflicts, sanctions, or policy changes, can potentially disrupt supply chains, creating a sudden deficit and driving up prices. The Russian war in Ukraine is the most recent example of this.
Conversely, a resolution or easing of geopolitical tensions can have the opposite effect. During the thawing of relations between Iran and the West and the signing of the Iran nuclear deal in 2015, for example, the subsequent lifting of some sanctions allowed Iran to increase its oil exports, adding to the global oil supply. The anticipation of this increased supply led to a decrease in oil prices.
Oil traders should stay abreast of international events and any potential geopolitical tension as they provide opportunities for potentially profitable trading strategies, albeit with higher risk due to their unpredictable nature.
Oil trading hinges heavily on the understanding and navigation of key economic events. By carefully analyzing inventory reports, monitoring OPEC meetings, and staying attuned to geopolitical shifts, traders can make informed decisions that potentially lead to profitable outcomes. However, these signals, while vital, should be part of a broader trading strategy, which also incorporates robust risk management practices and sound technical analysis.
The global oil market is in constant flux, requiring traders to cultivate flexibility and adaptability. Quick, informed decisions, coupled with the capacity to recalibrate strategies based on new information, sets successful oil traders apart.
This article was originally posted on FX Empire