Some of the most profitable – and risky – investments are Oil futures. To trade Oil, an investor must deal with futures contracts, which are either cash-settled or physically delivered.
Physically-delivered contracts require the holder of the position to deliver the physical commodity on the specified delivery date. With cash-settled contracts used by online traders, on the other hand, the holder of the position is debited or credited with the difference between the entry price and the final settlement when the contract expires.
Before investing in Oil, savvy traders should consider the major factors that can affect its price.
- Supply and Demand
The global supply of Oil is currently greater than demand, which has depressed prices. OPEC members and certain other Oil-producing countries, including Russia, attempted to rebalance the market last year by cutting production, but a sharp increase in U.S. output offset OPEC’s efforts, ultimately causing Oil to drop below $50 per barrel.
- Crises in Oil-Producing Countries
During periods of significant political or economic instability in Oil-producing countries, prices tend to rise, due to reduced output or investor concern. This has not been a major issue for traders lately, considering the excess global supply of Oil, but any further unrest in hotspots such as Nigeria and Libya, or the implementation of trade sanctions, could cause prices to rise.
- Seasonal Consumption
Like most commodities, weather conditions can affect Oil demand around the world. In the northern hemisphere, Oil is used for heating purposes in the winter, which causes prices to rally, while increased use of air conditioning units in the summer can also cause prices to spike.
- Value of the U.S. Dollar
The value of the U.S. Dollar affects the price of Oil and all other commodities denominated in USD. The relationship between Oil and the greenback is described as a negative correlation: when the USD strengthens, Oil prices tend to go down, and vice-versa.
Those interested in trading Oil can use a commodity trading platform online, such as the one provided by UFX, which offers opportunities to buy and sell the commodity without having to physically deliver it. Using a wide range of advanced tools and charts, you’ll be able to trade in the best trading conditions. The broker’s economic calendar enables traders to follow significant events that might have an impact on the Oil market, such as OPEC meetings, economic growth reports, and housing market data.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.
