Greetings traders and welcome back.
Thank you for joining me again.
My name is Chris, and I will be your host as we slide down
the slopes of Survival Guide street.
Today, we're going to be discussing crude oil futures, which is
a subject that I'm particularly excited to bring you because
of the profound effect that the coronavirus has had on the market as of recently.
We just recently witnessed the May contract go to negative
numbers. This is something that has literally never happened
before, and as such, this makes this a very relevant subject
indeed. But before we get going any further, let's show you
how you can apply some oil futures to your chart as well,
so you can perhaps follow along. We're going to go up to the
top left where we're going to click on our search bar.
We're going to give ourselves a "/CL". After we do that,
give it a click, give it a click, and we are all set.
That's all there is to it. Now let's dive on into it.
When someone says commodities trading, my head is personally
immediately brought to the oil market.
The oil market is incredibly popular, and when you think about
it at its core, it's almost impossible for the average person
to go throughout a normal day-to-day life without using something
that somehow or another was impacted by crude oil. Oil-related
events dominate global news on a daily basis. From being the
largest IPO in history through the constant volatility and bouncing that's going on
now with the coronavirus, to global trade wars and military
conflicts, oil has been a mainstay in the most significant
events of the last few decades. And despite this, there is
profit to be made in trading it, but it also makes it a very
volatile market, so it is absolutely not for the faint of heart.
We're going to dive into oil futures, and we're going to learn
a thing about where the oil comes from and how the futures
operate. And hopefully at the end of all this, you might be
a little bit more informed on whether or not oil is right for you.
So kick back and let's get comfortable with some crude oil information.
Crude oil is everywhere around us.
When you turn on your light, when you cook your dinner,
when you drive your car, even when you choose your clothes.
All of these everyday activities are related to crude oil, but how can this be?
If you use, or have ever used, any of these products at some
point or another, you have inadvertently supported crude oil.
Whether it be fuel, textiles, steel, smart phones, cosmetics, plastics,
fertilizers, all of these things are powered by crude oil in one way or another.
But where is the source?
Where does this black gold originate from? How did it get here?
Well, living organisms that died millions of years ago decomposed
overtime and mixed with the soil. Under various external factors
such as rain, wind, and sunlight, they transform themselves
into these so-called fossil fuels. Coal, gas, and crude oil
are all various types of fossil fuels. Fossil fuels are found deep
below the ground surface in various layers of the earth. Crude
oil, for example, is mostly present in sedimentary rocks in
the Earth's crust. Over time, the mix of different organic
molecules left from dead marine life combined with sediment
and under the influence of other natural factors, work together
to form crude oil. Now, crude oil is not always the same.
Its composition may vary depending on its geolocation.
Doo-doo-doo-doo-doo Secret Agent Man repelling in here to
do an extraction and teach us about how crude oil is extracted
from the ground. Our first method that we use to get crude
oil out of the ground is called primary recovery. And relative
to these other two, primary recovery is pretty straightforward.
It is applied when under the influence of ground pressure,
the oil has naturally risen to the surface and can just simply be directly collected.
Our next method is going to be secondary recovery.
Secondary recovery requires an injection of water
or gas into the oil reservoir itself to move the oil to the surface for collection.
Our third option here in regards to extraction is going to
be enhanced oil recovery, otherwise known as EOR.
Enhanced oil recovery is also based on the use of additives like water,
gas, or polymers to affect the structure of the oil reservoir and make it flow
smoothly to the surface for collection. While primary recovery up
here usually collects around 10% of the oil
in the reservoir, secondary recovery accounts for maybe 20-40%,
and EOR down here at the bottom is the most
efficient by far, as it usually recovers somewhere around 30-60%.
We briefly mentioned that crude oil is part of things like
the textile industry, cosmetics, steel, fertilizer.
It's also part of obvious things like gasoline, diesel,
and kerosene, but there's over 6,000 different products on
a broad scale that use crude oil as a base. But it's important
to remember that when crude oil comes out of the ground,
it's really not ready to be used for all of these things
until it is first refined and separated into multiple petroleum
products, all of which have these different applications.
Now let's talk a little bit about the oil futures market itself.
Oil futures contracts are the most commonly used
method of buying and selling oil.
They are used not only by traders like us that are speculating,
but also by importers and exporters who aim at hedging against
unexpected price changes and volatility caused by unexpected
events. And this is good news to us as speculators because
what does this do but add to more liquidity in our market
that we're interested in trading. Oil futures are traded
on exchanges in the form of different oil benchmarks.
The idea of having a benchmark is to help the traders identify
the quality and the origin of the oil that they are trading.
Due to the fact that oil may have different quality depending on its drilling location,
it is always important for traders to get familiar with such
details, so they can potentially be more aware of that particular
price and value that they're looking at. An example of why
this would be interesting or important to us would be that,
if the oil were to be coming from Iraq and the country's biggest importer
introduces a trade restriction against it, then the cost
of that particular commodity, being the oil, would be massively
influenced, and us as traders should definitely be aware and ahead of this.
On this subject of benchmarks, the two most popular benchmarks are
West Texas Intermediate and Brent Crude. West Texas
Intermediate just goes by WTI for short. WTI is drilled mainly
in the U.S. in states like Texas, North Dakota, and Louisiana.
Brent Crude on the other hand, is drilled from oil fields in a variety
of locations, such as places around the North Sea, Oseberg,
Ekofisk, as well as other areas near the shore of Norway
and the UK. Thanks to the oil being drilled so close to the coast,
it is relatively easy and cheap to transport internationally.
And something that we should mention while we're on the subject
of these benchmarks, is we should talk about OPEC.
And it's difficult for me to type so don't make fun of my handwriting here,
but OPEC is something that stands for the Organization of
Petroleum Exporting Countries. OPEC has created what they called "the basket".
OPEC uses this basket price, which takes the prices
at which the commodity is traded in the separate member countries,
and calculates the average.
Usually the OPEC prices are lower because the oil from some
of the countries included in the basket has a higher sulfur
content, which makes it less useful and in turn, less valuable.
Something all crude oil traders, as well as just all people
in general, should be aware of is the fact that crude oil is a finite supply.
That means we will eventually run out of it, an end will
come. The reason this matters to us as traders, and we should
take note of it, is because basic economic theory suggests
that goods with a finite supply will only increase their
value over time, and this chart here roughly illustrates what
I'm talking about. If we were to watch the crude oil supply
dwindle as we ran out of crude oil, we would
expect to see the oil curve continue to climb higher at an equal and opposite rate.
So even though crude oil is finite and we expect it to be
something that we don't have access to, we're still expecting
to see it hang out for around roughly the next 30 years.
And that's based on some arguably archaic estimates from the 1970s.
We're still finding new oil wells today, and this estimate
was based on the fact that we had already found all of the
largest oil supplies in the world around the 1970s.
The point here is, as the oil prices, or as the oil supply I
should say, starts to drop, we should definitely be on the
lookout for the value of oil to definitely start increasing.
But remember, the drive with the planet right now is to push
away from the petroleum desire here.
We are progressively working our way to being less reliant
on oil, and that could absolutely be something that should
be factored in when we're trying to anticipate what the prices
will do as the supply starts to dwindle.
But overall, the idea is, the less of something there is, the more people
are willing to pay for it.
Here we have some crude oil specifications here, in regards to a futures contract.
And if you're ever looking for this, remember we can always
just navigate over to the CME group page, which is where
all of this information has now come from. The product symbol,
which is the most important thing, is going to be this "CL".
This is what we typed in in the beginning to pull up crude oil on our charts,
just make sure you remember the "/". As far as the contract
size, it is going to be 1,000 barrels of oil, which is somewhere
around a 136 metric tons. That is a lot of oil.
As far as the price and the price fluctuation, we've
got a $10 per contract, with one cent per barrel fluctuation option here.
The rest of this is going to be trading months.
I'm not going to mention this stuff just because it is going
to be something difficult to remember, and it's always readily available.
Here we have the rest of the contract specification.
Once again, all of this stuff here is going to be more nitty-gritty stuff
that's a little bit more difficult to remember because it's
a lot of almost legal-style mumbo-jumbo.
I strongly just recommend going over to the CME group page
if you ever need to make, or to check in on, the trading hours
specifically, or go ahead and check out the termination of
trading characteristics of whatever futures contract you're interested in on.
Although crude oil at times can seem random and volatile,
there are two reports to definitely keep in mind, which I
would consider to be a mandatory requirement
if you want to be a successful crude oil trader, and that
would be the crude oil inventories, which are issued weekly
and released every Wednesday at 10:30 p.m.
by the Energy Information Administration, which we know as
the EIA. And we also have the American Petroleum Institute,
known as the API, which releases a report every Tuesday, at 16:30 eastern time.
So as far as the Energy Information option, this
is basically crude oil inventories that they're coming out with,
that measures the weekly change in the number of barrels
of commercial crude oil that's held by U.S. firms.
This can help us get an idea of potential price movements
for some petroleum products, which have a direct effect on
inflation. An example of this would be, if there's an increase
in the crude oil inventories, released here by the EIA,
there will be a weaker demand, which will decrease the price and vice versa.
And once again, these reports are released every Wednesday
at 10:30. Then going on to our API release, our American Petroleum
Institute release that comes out every Tuesday,
this is something that highlights the most important petroleum
products that account for more than 80% of total refinery
production. It's a very useful report for traders to pay
attention to. And the weekly statistical analysis does just kind
of pull out a lot of the current state of affairs with how oil
inventories are looking. And once again, this can be a major
predictor in how we should anticipate the markets in a bullish
or bearish manner going forward with trading.
Crude oil is often considered a useful indicator for the
state of the global economy. And to understand why, we're going
to focus on the two major factors that influence this price.
And the first one is going to be the economic factor.
That's what we're going to talk about first. In recessions
or periods with low economic growth, people often seek ways to cut their costs.
One of the major expenses on the family budget is usually
the cost of fuel. That is why if the economy is in a bad state,
individuals tend to drive less. Airlines also witness a drop
in the number of tickets sold, as people do not have the spending
power to go abroad and travel as much when the economy is
booming. This means that there is an overall decline in the
demand for oil, which is obviously directly related
to its price. Then another driving factor is the geopolitical
factor. The global political landscape is the other detrimental
factor when it comes to the oil price. Wars, think of the one
that we've been going on with forever in Afghanistan and
Iraq, and political turmoil often leads to changes in the cost of the commodity.
An example of this would be, when the Libyan Civil War began
I think in 2011, crude prices rose somewhere around 25%
in the space of just a few months.
It's also worth noting that some of the biggest oil producers
worldwide happened to be countries and regions that are known
for their fragile political environment. A big chunk of crude
oil's production comes from Saudi Arabia, Kuwait, Nigeria and
Russia, as well as other very volatile countries.
These are things that we definitely need to take into consideration
when tracking the crude oil landscape.
How about "oil" give you some recommendations? Ha ha.
Some recommendations that are coming from my heart
if you are interested in trading crude oil, would be definitely
to pay attention and understand the environment concerns associated with oil.
That means, as the global stance gets more aggressive against
oil, this can lead to restrictions, which in turn can lower
demand, which in turn can lower prices.
We always want to stay on top of these things. As the different
global economies and different buyers of oil in general
are pressured by different world saving organizations,
we definitely would be on the lookout for prices to drop,
and we can take advantage of this. Prices dropping doesn't
mean we have to lose money. Not us, because we don't own the
oil directly, we can in turn short the market if needed.
So this is a good thing for us in certain scenarios.
Something else that we should pay attention to is to be aware
of the time factor with oil production. Oil production requires
years of research and lots of investments. Think of the process
as something similar to the pharmaceutical industry. There
are years of laboratory analysis, and in the end, the result
may still not be satisfactory or go as planned.
That is why in the last few decades,
we've seen a lot of large oil companies try to change the
trajectory, and attempt to cut costs. Today, an oil company
will commence drilling usually only when it's around 90%
confident about the quality and the amount of oil they will
be able to extract from the ground. And even today, many companies
spend millions of dollars on projects that still don't live
up to their initial potential, or the estimated ROI, which
we know as Return on Investment. And thirdly, we want to make
sure that we are back-testing before we go live.
This is something that I think is absolutely crucial with
all forms of trading, but especially in those more volatile
markets like crude oil. Especially now with what's going
on in the world with the coronavirus,
We are watching the oil market do things that don't fit the
standard pattern that we've seen in years past.
So it's extremely important to make sure that at the very
least, to give ourselves some potential protection, that before
we ever even consider going live, we take our strategies and
back-test them and see how they would have performed throughout
particularly volatile scenarios like what we're going through today.
In conclusion, oil futures hands down has the ability to be one of the most
profitable futures trading niches out there. It has an extremely
high state of volatility, especially now with everything
that is going on in the market.
This means that it can be one of the quickest gains to a dollar, or one
of the quickest losses to a dollar if we're on the wrong side of the coin.
The market is moving at exponential rates. It is a very wild ride.
I strongly encourage you, if you are going to dive into the
oil market, like a large portion of futures traders have and
do on a daily basis, that you make sure you do your research
first, and at least adhere to a lot of the core information
like we talked about here today.
But until next time, thank you for joining me again today guys.
It has been a pleasure, as it always is. I wish you the best of luck in the markets.
But before you go, please make sure you click the like and subscribe button down below.
Thank you everybody. Cheers all of you and happy trading.