Here’s another interesting asset that we will be adding to our list of tradable commodities. Oil is a natural resource that impacts most aspects of our lives, but you already knew this. Here are some things that you probably didn’t know. The commodity that we are listing is called ‘Brent Crude’. It serves as a benchmark price for the purchase of oil worldwide. It is also used to price two thirds of the world’s internationally traded crude oil supplies. One of the reasons why Brent crude is used as a benchmark is because it is easy to refine into different products such as petrol, so its demand stays more consistent. Because it is extracted from the Sea its output can also be raised as required.
So what are some of the price drivers that you need to be aware of? Being a commodity, macro-economic factors obviously play a huge factor. When global economies are performing well, the demand for oil will also be high which will drive up prices. This comes from a greater demand from manufactures or companies in logistics, transport etc. When countries are going through a recession, production slows due to a fall in demand from consumers leading to a decline in price.
The next factor is OPEC (the organisation of the Petroleum Exporting Countries). By controlling the major supply of oil and operating like a monopoly, the OPEC group controls the global prices. Politics can also play a huge factor, whether it is a revolution in one of the oil producing nations or imposition of sanctions (Venezuela, Iran). These factors can also push up the price of oil by limiting the supply. Finally, factors such as seasonality also play a role in the demand for oil. With summers getting hotter on account of global warming, you can be sure that there will be an increase in the need for air conditioning where previously there was none. Although in an ideal world we could meet this demand with cleaner energy, the likelier scenario is an increase in the demand for oil.
Looking at these charts, one can deduce that one of the major reasons why trading oil is so popular is because of its high volatility. Other benefits from trading Brent Crude include diversification. If you’re a cryptocurrency trader, one thing you can be sure about is that by trading crude oil you are truly diversifying yourself against the dips that your favourite altcoins might be going through.
Although several traders use Technical Analysis or study wallet movements of big whales to predict price movements, there are always moments of uncertainty. With a commodity such as oil, if its front-page news, and its about one of the factors that I’ve already mentioned you should be able to make a pretty good prediction about what direction the price of the commodity is going to go in. Going into Q3 & Q4 of 2019 the future of the equity markets look shaky. Given the low correlation that crypto also has with the equity markets, oil could be a good way to further diversify your portfolio if you’re a crypto investor.
If you can understand the fundamental factors behind the global demand and supply for oil, then similar to crypto, you can use technical analysis to determine the right time to buy or sell. If anything, oil prices are probably more transparent then crypto. OPEC is pretty open when it comes to ‘pump and dump’.
If you’re still unsure and want to test your strategies out, XP Invest provides its users with both virtual accounts and margin trading. So you can use minimal (or 0) funds to test out your hypothesis.
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This post was originally published on medium.com by the same author