CRUDE OIL: TRADING ‘BLACK GOLD’

Table of Contents
Crude Oil: How to Trade “Black Gold” ........................................................................................... 3

Oil Trading, Oil Markets.................................................................................................................... 4

‘Black Gold’ and Petroleum Today .................................................................................................. 4

Oil Markets, Trading and Key Players ............................................................................................. 5

OPEC .............................................................................................................................................. 5

Oil Market Drivers............................................................................................................................ 6

US Supplies .................................................................................................................................... 6

The EIA ........................................................................................................................................... 6

Techs on Crude ................................................................................................................................. 7

Psychological Levels ....................................................................................................................... 8

Pivot Points ..................................................................................................................................... 9

Strategy Approaches ..................................................................................................................... 10

How to Trade Oil Summary............................................................................................................. 10

Disclaimer ........................................................................................................................................ 12

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Crude Oil: How to Trade “Black Gold”

Crude oil is one of the most followed, analyzed and traded commodities on Planet Earth. And in
terms of economic value – the production, distribution, refining and retailing of oil products make
it critical to the global oil and gas industry, among the world’s largest.

In this guide, we’re going to start off by looking at what made the oil market into what it is today.
This history runs alongside the growth of capitalism, and oil’s role in that growth was a key
component in how geopolitics have allowed for modern economies to build in the manner that
they have. We’ll drill down into major drivers behind crude oil prices, along with major players such
as OPEC. Then we’ll move into more practical matters for traders, and look at items that may be
able to help support a trading strategy or approach in oil, honing in on some technical criteria that
can, hopefully, simplify the prospect of analysis and trading strategy for this very important market.

John D. Rockefeller in 1875, just Five Years After Starting Standard Oil

The role of oil in modern society can be tracked along with technological advances as this
commodity has been key to energy production. From the oil lamps that lit street corners in the

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1900’s to the refined gasoline that powers much of this world’s transportation today, oil and its
related products have played a key role in modern society’s growth.

The story of oil can’t properly be told without inclusion of John D. Rockefeller, who started his
company Standard Oil in 1870. Rockefeller amassed considerable wealth as kerosene and
eventually gasoline began to drive the economy, first as lighting oil until the introduction of
electricity; and then as motor oil through the refined gasoline product. Rockefeller seemingly built
a monopoly, eventually controlling 90% of all oil in the United States which also allowed him to also
take control of railroads which depended on his oil shipments. It was with this grip of control that
Rockefeller was able to dramatically drive down the cost of production which further enabled
crude oil to propel growth through the early 1900’s.

Rockefeller’s Standard Oil was soon broken up, however, when the Supreme Court ruled in 1911
that his company was in violation of federal antitrust laws. Standard Oil was broken up into 34
different companies, many of which still trade today including ExxonMobil and Chevron.

Oil Trading, Oil Markets

‘Black Gold’ and Petroleum Today

While oil is still in heavy demand today, and in many ways is still governed by similar supply/demand
characteristics that were in play 100 years ago; petroleum has a far different role in society.

While many pushes towards environmentalism have shifted or attempted to shift demand away
from fossil fuels, Petroleum is commonly found in a number of products or areas that many people
might not expect. Oil is a raw material for many chemical products, like pharmaceuticals, solvents,
fertilizers and pesticides.

But its main usage remains energy. Oil accounts for a large portion of the world’s energy, supplying
approximately 32% of Europe and Asia’s consumption. But, in the Middle East, where oil remains a
primary commodity, approximately 53% of energy consumption is supplied by oil with 44% from
South and Central America, 41% from Africa and 40% from North America.

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Oil Markets, Trading and Key Players

Like most other markets, oil prices are largely determined by supply and demand. It’s those levers
of supply and demand in oil that remain so incredibly interesting, and to address those, we have to
identify some key market players.

Oil deposits are found globally as a naturally occurring fluid found in rock formations. This fluid is a
mixture of hydrocarbons and other organic compounds, thought to come from ancient plankton
after being exposed to heat and pressure in the Earth’s crust over hundreds of millions of years.
So, to dispel and old myth – oil does not come from dinosaur bones; it’s actually older than that.

These deposits are found all over the world, with a heavy concentration in the Middle East. And
given the highly competitive nature of markets, the finite amount of extractable oil, there was
strong motivation for producing nations to band together in the effort of controlling the market.
This gives rise to OPEC.

OPEC
OPEC stands for Organization of Petroleum Exporting Countries. It was founded in 1960 in
Baghdad, Iraq with five members--Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. The latter wasn’t
in the Middle East but in Latin American where it had (and has) massive oil deposits. Qatar and Libya
joined OPEC shortly thereafter and over the next decade, OPEC grew to include UAE, Algeria,
Ecuador, Nigeria and Gabon.

The motivation for creating this cartel was simple and obvious: To control supply, which in turn
could help these producers to control price. Since demand was going to be a constant, with energy
needs continuing to grow as the globe expanded and became more inter-connected, this supply
constraint helped oil prices to remain relatively strong. For member nations, profits were fairly
predictable given that they had say over how much oil would be extracted and sold.

While it may sound simple to ascribe negativity to a cartel designed to manipulate energy costs,
OPEC wasn’t the first cartel built around oil, and this may have been further motivation to oil
producing nations to come together in effort of creating OPEC in the first place. Before OPEC, the
‘Seven Sisters’ cartel dominated oil markets. This actually came at the suggestion of the US State
Department in response to Iran nationalizing its oil industry.

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The strategy was to create of a consortium of oil producers, many of which happened to be linked
to the same Standard Oil that was broken up 38 years earlier. This group of seven companies was
initially dubbed the ‘Consortium for Iran,’ and exerted heavy political influence and market weight
to, in essence, allow for US and British companies to meter some control over Mideast production.

But the creation of OPEC largely eliminated the influence that the Seven Sisters had on oil prices,
and for much of the next 50 years, OPEC would exert considerable control over the price of oil.

Oil Market Drivers

Ok, all of that about OPEC to say – they’re not as important as they used to be. Why? There are a
number of factors including the rapid expansion of US oil production combined with a massive
amount of oil in Russia. Neither nation is part of OPEC but both furnish considerable supply.

Nonetheless, OPEC still does exert some control over oil prices and it still plans for supply quotas
in the effort to control supply and, in turn, price. OPEC remains a major market driver for Oil prices,
even with US and Russian production playing key roles in the global market. More recently, OPEC
has teamed up with non-OPEC nations in effort to exert even greater control over supplies while
also attempting to retain some control over global prices.

Staying abreast of OPEC events is key for those tracking fundamentals in oil.

US Supplies
Recently, the United States has massively increased domestic oil extraction and is now the top
producer of crude, globally. This has been helped along by advances in shale extraction and
horizontal drilling, often called ‘fracking.’ While fracking remains politically contentious, it has also
unsettled oil markets by introducing competition for OPEC.

The EIA
The US Energy Information Administration releases a weekly report on inventory in its Cushing,
Oklahoma storage facility. This is a look at supplies that have been added or reduced, and can be
a big driver. Traders know to expect this report each Wednesday at 10:30 AM ET.

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This report can open the possibility of fresh trends and/or breaks above/below big support or
resistance levels. This newly acquired information has the potential to create fresh moves, making
crude oil prices on Wednesdays especially interesting.

The report can also help to dominate a trader’s stance: Since we know fresh information will be
supplied mid-week, it can make the prospect of riding a trend a bit more challenging. This can,
however, open the door to some erratic activity that could allow for breakout or reversal strategies,
after which near-term trends may develop. You can see changes in prices, support & resistance
and pivot points at DailyFX’s crude oil content hub.

DailyFX Economic Calendar: Weekly EIA Inventories Report

Techs on Crude
Given the backdrop that we’ve just discussed, where supply/demand is the main driver and that
supply is largely in-control of a combo of OPEC, the US and Russia; technical events in crude can
be of key importance in between fundamentally driven moves.

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CRUDE OIL: TRADING ‘BLACK GOLD’

As in, if crude prices open the week with a strong rally up to a point of resistance, and the
Wednesday EIA report shows a build in inventories, there could be a stern reversal to play-through
on Wednesday that may run through the end of the week.

Or, take for example, an OPEC event when an upcoming meeting has the cartel discussing the
prospect of production cuts in the effort of buoying prices. Market participants will often try to
‘price in’ such events, and this is when support can come into play to help cauterize the sell-off or
when resistance can come in to help cap the advance.

So, support and resistance may be an even more applicable framework in a commodity like crude
than it is perhaps in an FX pair that could see a constant trickle of drivers hitting the headlines.

Psychological Levels
This can be huge in crude oil prices.

Psychological levels are prices at rounded, even whole numbers that have a tendency to elicit
support or resistance to induce possible trend changes or reversals. And while it might be easy to
discount something as simple as a rounded whole number as a support or resistance value, there’s
a reason that most retailers employ a similar strategy with their own pricing.

When you see prices that end in increments of .99, well that’s a seller trying to make the product
seem less expensive. Because we, as human beings, can’t really help the fact that 99.99 feels much
cheaper than just two cents less than 100.01.

This human behavioral pattern plays out through markets, too, and this is the study of
psychological levels. On the daily chart below, we’re looking at crude oil prices for slightly longer
than the past year (as of this writing). Levels have been added at each $5 increment from $20 up
to $75, and resistance inflections have been marked in red while support inflections are in blue.

Notice how these prices didn’t come into play for every turn or major move, but they did furnish
some element of drive around a number of those events.

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CRUDE OIL: TRADING ‘BLACK GOLD’

Crude Oil Daily Price Chart Sept, 2019-October, 2020

Pivot Points
On that tune of support and resistance, one of the older mechanisms of support/resistance
identification can be helpful, as well. Pivot points initially came into play by floor traders looking for
a simple way to calculate ‘cheap’ or ‘expensive’ before computers or even calculators were
common. This simple, back-of-the-envelope math could allow for quick calculation of ‘s1,’ ‘s2,’ and
‘s3’ levels so that traders could see possible supports (and vice versa on the side of resistance).

This can still be an effective tool for shorter-term strategies, particularly daily pivots utilized with
an intra-day approach.

Learn More About Support and Resistance with IG Academy

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CRUDE OIL: TRADING ‘BLACK GOLD’

IG Academy is free to those with IG demo or live accounts, and there’s a number of technical
tools that are taught through its curriculum. If you’re looking to expand on support/resistance
identification, or even technical analysis, this can be a great browser “favorite” or bookmark.

Strategy Approaches
Probably one of the most alluring ways of approaching crude oil markets is with breakout or
reversal strategies, and that’s very much along the lines of what was looked at above. While trends
can definitely show in oil markets, shorter-term strategies will often be powered by unpredictable
supply-side drivers, and that can make the prospect of riding a longer-term trend with tighter stops
or more aggressive risk management less viable.

For breakout/reversal strategies, traders are going to want to get acclimated with possible
support/resistance areas; looking to keep stops very tight so that if they end up on the wrong side
of a news announcement or a headline event, the trader can prioritize loss mitigation.

For those who do want to focus on trending states in oil markets, longer terms may be more
amenable; giving the trader a little more potential to avoid intra-day or intra-week noise that may
cause tighter stops to be triggered. When we are in the midst of one of those longer-term trends,
it will likely be driven by a fundamental event, such as OPEC talking up future production cuts or
items of that nature. DailyFX will follow those if/when they happen.

How to Trade Oil Summary

• Oil is in heavy demand today as an energy source. In many ways, it is governed by

supply/demand characteristics in play 100 years ago.

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CRUDE OIL: TRADING ‘BLACK GOLD’

• Key market players are OPEC, Russia and the US.

• Oil traders scrutinize The US Energy Information Administration weekly report published on
Wednesday at 10:30 AM ET. They also watch for OPEC led news events.

• Technical traders often rely on pivot points. This can be an effective tool for shorter-term oil
trading strategies, particularly daily pivots utilized with an intra-day approach.

• DailyFX’s crude oil content hub tracks changes in oil prices, support & resistance levels and
pivot points.

• A comprehensive approach that incorporates both fundamental and technical analysis can
help oil traders develop a robust strategy.

• Developing a comprehensive trading strategy and following sound risk management

techniques are critically important

• Open a demo trading account with IG

• Additional trading resources

Learn to Trade with a free

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We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

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CRUDE OIL: TRADING ‘BLACK GOLD’

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High Risk Investment

Trading commodities, such as oil, on margin carries a high level of risk, and may not be suitable for all investors. The high
degree of leverage can work against you as well as for you. Before deciding to trade oil you should carefully consider your
investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess
of your initial investment. You should be aware of all the risks associated with oil trading, and seek advice from an
independent financial advisor if you have any doubts.

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