Why do investors buy and sell oil?
Investors and institutional investors investing in oil today do so for different reasons and in different ways. For example, some choose to make these investments by subscribing to UCITS with the aim of investing for the long term, and others seek to take advantage of the micro-movements caused by the high volatility of this commodity by using CFD-type contracts or contracts for difference which are accessible via online trading platforms.
One of the first explanations for this craze is the basic upward trend that this asset seems to have been following for several years now. This rise is explained by specialists in this sector as being due to an increase in demand from emerging countries such as Asian countries, but also to the various conflicts and geopolitical tensions affecting the various producing countries with the risk of a too weak supply of black gold to Western countries.
Analysts also explain that oil is a finite resource and that reserves cannot continue to meet demand indefinitely. However, we know that the rarer a product becomes, the more its price tends to rise, especially if needs, and therefore demand, do not fall. For shorter-term traders, oil also has the advantage of being a highly volatile asset that reacts powerfully to certain events and publications.
The different ways of buying and selling oil :
There are, of course, various ways of investing in oil by buying or selling this raw material. For example, it is possible to use futures or forward contracts for this purpose. This is one of the preferred means of investing in the price of oil over the long term. However, investing in black gold futures contracts requires a certain knowledge of the market and the ability to effectively anticipate future trends.
Another medium that is currently experiencing a great deal of growth and which allows speculation on fluctuations in the price of oil concerns derivative products. This type of trading instrument is offered by online brokers or brokers and takes the form of CFDs or warrants.
These two methods therefore allow stock market investors to buy and sell barrels of oil on the market. Of course, this is not a question of physically buying and selling these barrels as this would require storing and moving them, but simply taking a position on the price of these barrels.
The choice of one or the other of these methods of investing in oil will depend above all on each person's investor profile, their investment horizon and the capital invested or the level of risk they are prepared to take.
How to achieve good oil price expectations :
Before investing in oil, it goes without saying that an investor must know how to study the oil market and its environment in order to be able to detect in advance the future trends that this asset will follow. Indeed and whatever the type of investment envisaged, it is necessary to be able to spot upward or downward movements in order to buy or sell its assets at the right time.
Several external factors can indeed have a direct influence on the price of WTI or Brent oil and it is necessary to analyse them systematically before buying or selling barrels.
This concerns in particular the relationship of oil with the US dollar. Indeed, we know that like other raw materials such as gold or natural gas, the price of oil is quoted in US dollars. Thus, there is an inverse correlation between the value of the dollar and that of oil. This means that a strong dollar will make the purchase of oil less attractive to foreign investors because of the unfavourable exchange rate. This will therefore most often lead to a drop in demand and therefore a drop in the price of oil. The opposite is also true, since a weak dollar will make oil more attractive, increase demand and thus lead to higher prices.
Another very influential element with regard to the evolution of crude oil concerns the publication of American stocks. Indeed, the United States is currently the world's biggest oil consumer. Thus, the state of stocks in this country, which are published on a weekly basis, is an important indicator for determining the level of demand. Here, it is important to compare these stocks with analysts' forecasts. When these stocks are larger than forecast, it means that demand is weak and generally causes prices to fall. When inventories are lower than expected, this indicates rising demand and may cause prices to rise.
Finally, it is of course also important to study the supply of oil before buying or selling this raw material. Indeed, the price of oil is, as is the case for any asset listed on the stock exchange, defined by the strength of supply and demand. However, as far as supply is concerned, this paper examines several types of publications concerning producing countries and barrel production in general. In particular, we will keep an eye on the quotas set by OPEC and OPEC +, which are generally intended to influence prices up or down. Current events and conflicts involving these producer countries can also have a strong impact on the price of this commodity. In times of geopolitical conflict with one or more producing countries, it is common to see a significant rise in crude oil prices as investors fear a slowdown in supply to importing countries.
When is it best to buy or sell oil?
Another very important question that oil investors ask themselves is when is the best time to buy or sell black gold. Of course and logically, it is better to buy at the earliest in an uptrend or to sell at the earliest in a downtrend and in order to benefit from the maximum amplitude of the movement.
In summary, and to know when it is best to buy or sell oil, the following indicators should be considered:
- The geopolitical news and the decisions taken by regulatory bodies such as OPEC and OPEC + will give you excellent indications. Indeed, we generally observe movements of great amplitude, both upwards and downwards, following OPEC meetings and according to the decisions taken there. Of course, these decisions are not to be interpreted alone and you must also take into account the market's expectations in this regard.
- As we have seen above, the difference between supply and demand will have a strong influence on the evolution of the price of crude oil. Indeed and logically, a strong demand with a low production will probably lead to a rise in prices, whereas a strong supply and a weak demand will have the effect of lowering prices. Several elements have to be taken into account with production quotas, the discovery of new deposits or competition from shale gas. On the demand side, other indicators will be interesting to analyse, such as the economic growth of countries with a strong industry and therefore high consumption of energy raw materials. As noted above, U.S. inventories are also interesting demand indicators.
- Of course, it is also imperative that you use historical oil price charts to detect the strength and reliability of a trend. Experienced investors use a number of technical trend and volatility indicators to get signals to buy or sell oil. These signals must of course then be compared with the signals obtained through fundamental analysis.