2020 was a year of upheaval for crude oil trading. Crude oil has always been a portfolio necessity. However, over the past few years, due to increasing demand for alternative fuel options and the COVID-19 pandemic, the crude oil market has suddenly become a risky venture.
Some contend the reason for crude oil’s increased uncertainty is purely due to the pandemic. Others note how consumers are becoming more and more comfortable with lower levels of oil, with more remote workers and alternative fuel sources. Markets continue to contend with fluctuating demand, making predictions unstable.
This article discusses the basics of trading crude oil in 2021. It uncovers four reasons for crude oil’s volatility and the COVID-19 pandemic’s effect on the industry. It also provides a prediction for how the commodity will evolve in 2021 and beyond.
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The Impact of COVID-19 on Crude Oil Trading
The most glaring impact of COVID on crude oil trading came from 2020 travel restrictions. Less air and commute travel meant significantly lower demand throughout 2020. In the spring of 2020, the Organization of the Petroleum Exporting Countries (OPEC) cut supply.
They vowed to increase their output levels gradually, but when another wave hit in the summer, OPEC was forced to reimpose limits. Responses similar to those imposed in the summer continued throughout the rest of 2020.
More recently, with the increase of vaccine distribution, there was optimism for market stabilization. However, as COVID cases continue to surge in India, and the OPEC issued a statement acknowledging the potential threat to demand. These recent developments suggest the market outlook is still wavering due to COVID-19.
Crude Oil Status Update
International Brent crude oil prices averaged $6 /b (per barrel) in March, which was up $3/b from February. The U.S. Energy Information Administration’s (EIA) short-term Energy Outlook released on April 6, 2021, predicted crude oil retaining its $65/b price for the second quarter and $61/b in the second half of 2021.
The favorable price outlook comes from increased vaccinations and the OPEC regulating supply due to decreased demand. At its March meeting, they announced the regulations would continue until at least August of 2021.
All of this information speaks to the volatility of crude oil prices for the remainder of 2021, but how can you develop a strategy to enter the crude oil market in 2021 without feeling like you’re speculating?
WTI Vs. Brent Crude Oil
Two oil grades serve as benchmarks for other oil prices, the WTI at Cushing and the North Sea Brent. The WTI at Cushing is a significant determinant of U.S. crude oil prices, while the North Sea Brent comes from Northeast Europe and determines international crude oil prices.
Four Reasons for Today’s Volatile Oil Prices
Crude oil market behavior used to be relatively predictable- spikes in the spring due to tourism increases in the summer and after demand peaked in the summer, dropping prices in the fall and winter.
The pandemic set the stage for the recent volatility in crude oil pricing. Rising U.S. oil production, slowing global demand, the diminished clout of OPEC, and the U.S. dollar gaining strength occurred in response to the pandemic.
Slowing Global Demand
The EIA estimated global oil and liquid fuel demands were 92.2 million barrels per day (b/d) in 2020 compared to 83 million b/d in 2019. The slowing demand prompted OPEC to regulate supply. The EIA expects demand to increase by 5.5 million b/d in 2021 and another 3.7 million b/d by 2022.
Rising U.S. Oil Production
Since 2015, US producers have increased production of shale oil and alternative fuels such as ethanol. In 2018, the US became the world’s largest crude oil producer globally, and in 2019, US crude oil production increased to a record 12.1 million b/d, marking the first time since 1973 the US exported more oil than it imported.
Despite improved efficiency and extraction methods, the pandemic still affected US oil production. In January of 2021, it reached 11.1 million b/d, a sign of recovery. However, due to inclement weather in Texas and other areas of the country, that number dropped by 0.8 million b/d. The EIA estimates US oil production to reach 11.4 by the end of 2021 and 11.8 million by year’s end 2022.
Unpredictable OPEC Behavior
One of OPEC’s primary functions is to maintain the correct market share. However, Saudi Arabia, OPEC’s leader, wants to keep higher oil prices because its government depends on oil prices for revenue. Additionally, Saudi Arabia doesn’t want to lose market share to the US or Shiite-led Iran.
Shifting sanctions from the 2015 nuclear peace treaty with Iran have also contributed to crude oil’s volatility. Iran was able to export oil starting in 2016. When Donald Trump reimposed sanctions in 2018, their exports stopped.
Rising Dollar Value
Forex traders have been driving dollar value since 2014. Between 2013 and 2016, the dollar rose 30% in response to the Greek debt crisis and Brexit. It rose again by 8.4% between March 3 and March 23, 2020, and it rose another 8.4% during the pandemic. US dollars account for all oil transactions, and most countries correlate their oil currencies to the dollar. So, when the US dollar rises, oil prices drop inversely.
Crude Oil Trading Basics in 2021
Despite its volatility, crude oil is one of the best commodities to trade on futures contracts due to its high activity. Oil prices are prone to intense fluctuations based on news, which is why developing a proper price action strategy for crude oil can be a long-term, lucrative investment strategy.
This undulation also makes crude oil an attractive play for swing and day traders. With significant volatility, however, comes great potential. The following indicators and strategies can help you come out victorious with your crude oil trades.
Crude Oil Contract Specs
If you’re just starting to trade crude oil, it can be daunting. Before diving in, make sure you memorize the following crude oil specs:
- Crude oil ticker: CL
- Exchange: NYMX
- Trading hours: 6 p.m. to 5 p.m. ET
- Contract size: 1,000 US barrels (42,000)
- Contract months: All months
- Price quote: Price per barrel (example: $65.50 per barrel)
- Tick size: $0.01 per barrel ($10.00 per contract)
- Last trading day: Third business day before the 25th calendar day of the month preceding the delivery month
Crude oil traders should understand the futures market. When trading a futures contract, you can either buy or sell (call or put) the commodity by its expiration date at its stated price. If you hold calls, you need to offset the trade before the expiration to avoid physical delivery.
Tips on Trading Crude Oil Futures
When trading and tracking crude oil’s price movements, consider the price correlation between unleaded gas and heating oil. Demand for crude oil can be highest in both the summer and winter, but for different reasons. In the summer, demand spikes due to increased driving. In the winter, demand spikes for heating purposes.
So, if you’re trading during winter, watch the weather in the Northeast since it uses the most heat in the country. Due to its volatility, price action strategies can help you eliminate some of the time spent watching the news to see potential market influencers.
Volatile Market for Crude Oil Trade Futures
Crude oil prices are constantly subject to change from major news events. These can happen unpredictably and overnight. Supply and demand dictate crude oil prices, but emotions also dictate crude oil performance, especially with retail investors who day trade.
Political tensions in the Middle East are often the culprits behind wide price fluctuations. During these times, there’s no predicting the extent of the supply disruptions. Because of this uncertainty, traders typically act quickly in response to the news, adjusting strategies following price fluctuations.
Price Movement for Crude Oil
Prices move quickly because short position traders in the market reflexively cover their shorts if the price increases. To protect their shorts, they buy orders. The wave of buying happens simultaneously with speculators trying to establish long positions.
In light of the risk major supply disruptions cause, short traders cover their positions because they stand to lose more money than they invested, a disastrous occurrence for brokers that can easily result in termination.
Since crude oil markets are heavily by psychological shifts, there’s often bias in upward or downward movements. Additionally, since crude oil gets stuck in prolonged ranges after significant developments, price action traders who identify these price ranges can consistently buy low and sell high without considering psychological and emotional factors.
Day Trading Crude Oil Futures
Crude oil is a hotbed for day traders because these markets react well to pivot points and support and resistance levels. Stop orders are automatic and they can reduce the high risk of market fluctuations. Stop orders are imperative in the crude oil market, and many of the same principles that apply to stock index futures also apply to crude oil futures.
Conclusion- Crude Oil Trading Tips 2021
Crude oil futures have been a popular choice for swing, day, and price action traders for a long time. However, due to the financial consequences of the COVID-19 pandemic, crude oil has experienced more volatility than usual. Crude oil has always been a volatile commodity, but its swings were more predictable before the pandemic.
As vaccines roll out and traveling restrictions soften, we should see a return to pre-pandemic market behavior. However, as the spikes in India and unusual weather patterns demonstrate, these strange times indicate more strange market behavior ahead.
Consider employing a price action strategy to avoid being at the mercy of political developments and emotional trading strategy. Price action strategies protect you from emotional whims and unpredictable price changes.
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