Commodities

Trading Commodities

Commodity trading may prove very profitable if you can recognize and follow the long-term commodity cycles. 

 

1. Trading Oil Price Volatility

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

Two International Oil Types

There are two main types of oil:

1) Brent

Brent oil is the combination of 15 different types of oil. Brent is priced with a market premium of about $4-5 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 $1-2 per barrel in comparison with Brent and $5-7 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, (b) Opec price, and (c) Imported Refiner Acquisition Cost.

1. NYMEX Futures Price

2. The Opec Price (OPEC Basket)

3. US Imported Refiner Acquisition Cost (IRAC)

Methods to speculate on Oil Price fluctuations

  1. Derivatives (Futures and Options contracts)
  2. CFDs and CFDs on Futures (explained below)
  3. Buying shares of Oil Companies
  4. Buying an Oil Mutual Fund
  5. Buying an Oil-Stock ETFs (Exchange Traded Funds)

► Basic Information About Oil Trading

TRADING OIL PRICE FLUCTUATIONSOil Price Trading

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).

MARKET MAKERS / CFD BROKERS

-COMPARISON TABLE-

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What is a Contract for Difference (CFD)

A Contract for Difference or a CFD is a contract between two parties which are willing to speculate on the price movement of a financial asset. A CFD contract exchanges the difference between the entry price and exit price of a particular financial asset. A CFD may be used for speculating stocks, stock indices, currencies, commodities or even other financial assets (volatility, inflation etc). A CFD consists of two prices, the price at the time that is opened, and the price at the time it is closed. If the underlying financial asset rises in price, the buyer of the contract is paid from the issuer of the contract. The CFDs do not have a specific expiry date like for example options contracts -CFDs are renewed at the close of each trading day, and depending on the trader decision, they are rolled forward or abandoned.

A Historical View of the Price of Gold

The total amount of available gold in the world today is about 156,000 tons. Each year only 2,500 tons are mined from which the 2,000 tons are absorbed by the jewelry industry and the rest 500 tons are used as investment gold. As gold production is controlled and concentrated in a few countries -increased demand is often not satisfied by supply. Historically, gold was used as the world’s currency and during periods of financial turmoil gold is considered by many investors as a “Safe Heaven”. During these periods the price of gold is making excessive upward movements without intermediate corrections. Investor’s psychology plays a huge role in gold price movements. Market psychology beats the laws of demand and supply. In 2009 (in the middle of the financial crisis) market demand for gold fell 32% while the price of gold had a significant increase.

 

Gold Rally Price Explanation

The current rally of the gold price begun in 2001 -when the price of gold has fallen to 300 $ per Ounce. The current gold price rally is based upon:

∟ High accumulative government debt in the West Economies an outcome of the financial crisis of 2008.

∟ Money- issuing measures by the US FED which create inflationary concerns. High inflation leads to a weak US dollar which respectively leads to a high price of gold.

∟ Many investment portfolios around the world use more gold as a risk diversification tool during this period of financial instability.

∟ US Dollar is still weak and historically when the US Dollar is weak the price of gold is strong.

∟ Gold jewelry industry increased demand -demand deriving mainly from China and India

∟ The controlled and limited supply of gold which is in contrast with the unlimited and uncontrolled demand for gold.

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