TRADING OIL PRICE FLUCTUATIONS

Historically, the price of oil moves in a wide price range from 30 to 150 U.S. dollars per barrel. The leverage of capital taking place on derivative markets gives a good explanation of excessive short-term fluctuations of the oil price.

Two International Oil Types

It is estimated that worldwide there are more than 160 different types of oil which differ qualitatively and therefore, they are priced differently. 

Internationally, two major types of oil are traded:

1) Brent

Brent oil is the combination of 15 different types of oil. Brent is considered high-quality oil and is used for gasoline production. Historically Brent is priced with a market premium of about $ 4 to $ 5 per barrel in comparison to Opec Basket price (Opec Basket is mentioned later).

2) West Texas Intermediate (WTI)

WTI oil is characterized by high quality. therefore is mainly used for gasoline production. Historically, WTI is priced with a market premium of about $ 1 to $ 2 per barrel in comparison with Brent and $ 5 to $ 7 per barrel in comparison to the Open Basket.

How the Price of Oil is determined

There are three main ways to determine the price of oil: a) NYMEX price and b) Opec Basket price c) US Imported Refiner Acquisition Cost.

1. NYMEX Futures Price

The NYMEX crude oil futures started trading in 1983. The NYMEX oil price is definitely the most important and widely used method of reporting the price of oil worldwide. NYMEX Futures Price represents the value of a barrel of oil that it will be purchased in the future. NYMEX futures as derivatives let investors bet in both directions (↑long and ↓short).

2. The Opec Price (OPEC Basket)

OPEC collects oil prices from 7 oil-producing countries (Saudi Arabia, Dubai, Venezuela, Mexico, Algeria, Indonesia, and Nigeria) and configures the OPEC Basket Price in an attempt to capture the international pricing market conditions.

3. Imported Refiner Acquisition Cost (IRAC)

IRAC price is used mainly in the US. The value of Imported Refiner Acquisition Cost is formed upon the volume of US oil imports.

Photo: Oil platforms will prove crucial (but also dangerous) in maintaining high levels of future oil supply

The following table presents the Largest Oil-Producing Countries

 

 

Alternative Methods to Trade the Fluctuations of the Oil Price

Here are some popular methods for trading the fluctuations of oil:

1) Buy the Shares of Oil Companies

Most of the important oil stocks are traded in the U.S. and in European stock exchanges. Historically, oil companies offer high dividend yields and their shares are priced reasonable –avoiding the volatility of the NYMEX oil price.

2) Buy a Derivative Contract (Options & Futures Contracts)

Through a derivative market (ie Chicago Mercantile Exchange) you may buy a future oil contract and bet on a rising market (long position) or to a falling market (short position). A typical futures contract represents the value of 1,000 barrels of oil.

Alternatively, you can use a CFD contract.

3) Buy an Oil Mutual Fund

Around the world, a variety of mutual funds invest exclusively in oil. For example, we mention -Vanguard mutual fund and USA mutual fund. Note that the annual management-cost of a Mutual Fund is usually about 0.8% to 1% of the total value of their portfolio. When you buy Mutual Fund you must research the past effectiveness of the management.

► T. Rowe Price

4) Buy an Oil-Stock ETF (Exchange Traded Fund)

An Oil ETF consists a basket of oil stocks, much like a mutual fund, the difference is that an ETF is traded like common stock shares and are allowing easy entry and easy exit for every investor. This advantage is crucial for short-term traders. The Oil ETFs combine the advantages of risk diversification of mutual funds with the advantages of easy trading of the stock shares. Here are some Oil ETFs:
-United States Oil Fund (USO)
-Goldman Sachs Crude Oil Total Return ETN (OIL)
-PowerShares DB Oil Fund (DBO)

Tip: Investing in an Exchange-Traded Fund (ETF) is the most reliable and safe way to take advantage of the oil market fluctuations.

 

Links:

► CME GROUP -Chicago Mercantile Exchange (Controls Nymex)

► U.S. Commodity Futures Trading Commission (Oil Futures Statistics and Information)

 

 

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