Oil market volatility opens up trading opportunities

Oil prices can be highly volatile, but that opens up opportunities for traders, including in other assets that are closely correlated to the price of oil.

Oil barrels
Source: Bloomberg

Trading oil futures can be one of the most exciting markets for speculation, because there can be large percentage moves more than once in a single day. This volatility makes it a challenging market to trade, but for many this is a major drawcard and many of the best traders in the world have plied their craft in the oil market over the years.

Part of the volatility in the oil price is due to the global distribution in supply and demand for the commodity. Oil and oil-based products are used throughout the world, although it is the largest markets such as the US, China and Europe that often have outsized demand effects on the oil price.

Technological breakthroughs, such as deep-sea drilling, hydraulic fracturing, and oil sands processing, have diversified global oil production as well. Take the boom in US shale oil production as an example: the steep increase in domestic production dramatically cut US oil imports, contributing to the slide in the global oil price over the past couple of years.

What this means is that developments on opposite sides of the world can impact the spot oil price dramatically, whether it be increased tensions in major oil producer Libya or a hurricane damaging oil terminals in the US.

Keep a close eye on the data
It also means that there is a wealth of global data and information that is factored into the price. But not all oil-producing countries have robust and timely data series reporting their production and consumption of oil. In practice, this means that greater weight is given to the more timely and reliable data series, particularly those supplied by the Energy Information Agency (EIA) in the US.

US data understandably has a greater impact on the West Texas Intermediate (WTI) price, which is regarded as the US oil price benchmark, but the data releases nonetheless have a significant impact on Brent, which is regarded as the European oil price benchmark.

It’s therefore important to have an understanding of the key oil-related data releases. Here are some of the important releases:

  • The weekly EIA report released every Wednesday morning in the US. The most important data point is the total crude inventories number, but it also details information related to production and refinery capacity utilisation as well.
  • The weekly US Baker Hughes drill rig count, which is released every Friday, has also become a market mover since US oil production boomed in recent years.
  • The monthly Organization of the Petroleum Exporting Countries (OPEC) report, which is usually released between the 10 and 20 of every month, provides an important gauge for oil output in the rest of the world.
  • It is also worth being aware of the weekly CFTC positioning report, which shows positioning of long and short bets on crude oil futures. This is helpful in providing an additional input for market sentiment.

These are the basic fundamental drivers of the oil price amid many other oil-related data releases, but oil prices can swing dramatically with little apparent change in fundamentals. In these situations, one must rely on technical indicators to gauge the price move, but knowing when major oil data releases occur is very important as there can be major volatility around those releases.

There are other assets closely correlated with the oil price
Oil is one of the most important commodities in the world, and, consequently, major moves in the price drive a range of other assets. There are two G10 country currencies, sometimes known as petrocurrencies, which most closely follow moves in the oil price: the Canadian dollar and the Norwegian Krone. Canada is a major global oil exporter and oil makes up a large proportion of its total exports, while oil is major driver of Norway’s economy as it makes up nearly half its exports.

There are a range of other assets that are exposed to the oil price: Energy and oil services companies understandably benefit from higher oil prices, and so their share prices are closely correlated with the price of oil. The flip side is that big users of oil and oil products like airlines, transportation companies and industrial chemicals producers benefit from lower oil prices.

In recent years, high-yield debt has also been highly positively correlated with oil price, and one can gain exposure to this through Exchange Traded Funds (ETFs) such as HYG (iShares iBoxx $ High Yield Corporate Bond ETF).

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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