Crude oil futures are one of the most popular commodities on the market today. While they can be quite complex, you don’t need to know the ins and outs of these financial instruments to reap their benefits.
Whether you are a day-trader or corporate long-term investor, opportunities in crude oil futures contracts are boundless, due to continuous consumption throughout the world. That being said, the prices of crude oil futures are currently climbing as the situation between certain countries continues to unfold.
Shanghai International Energy Exchange (INE) offers crude oil futures contracts as an internationalised product, where it offers good opportunities for hedging and arbitrage for international traders.
In this article, we will take you through five things you should know when trading on crude oil and factors you can consider as a trader in crude oil markets.
1. Crude Oil’s Usage Is More Than You Think
The usage of crude oil in vehicles is just the tip of the iceberg. It may come as a surprise, but crude oil can be used in plastic production, clothing material, products in your home and even food products that you consume on a daily basis.
Forecast in the demand of crude oil will steadily increase as the years go by, where estimation of current world consumption is at 96.5 million barrels per day in year 2021 which is considered a drop due to the on-going COVID-19 pandemic that is affecting the world.
2. Crude Oil Futures Market Is Volatile
When you are trading crude oil futures, the very first thing you must know is that the crude oil is volatile, and prices for crude oil are prone to fluctuations. Supply and demand are two major factors that affect the price of crude oil. Here are some supply and demand factors that make crude oil market so volatile:
Supply factors
OPEC (Organization of the petroleum exporting countries): If the OPEC decides to reduce production of crude oil, the prices of crude oil go up due to reduced supply.
Unrest in the Middle East: The unrest caused by war in the Middle East can also impact crude oil prices because war can reduce or stock the supply of oil from the Middle East.
Demand factors
Seasonal demand fluctuations: Seasonal demand fluctuations for oil are well recorded. In general, the demand of oil during summers is mainly from increased travel activities. While winter oil consumption comes from people using oil products to warm their homes.
Oil consumers: In the past, US and other European countries were the major oil consumers. However, currently Asian countries such as China have also entered the list of countries with high oil consumption.
Any fluctuations in demand of oil from major oil consumers can directly impact oil prices, which can in turn cause fluctuations in crude oil futures.
3. China’s Import Of Crude Oil Is One Of The Highest In The World
China has been the global oil demand driver for the last decade, accounting for 44% of worldwide growth in oil imports since 2015, when Beijing started issuing import quotas to independent refiners. China have surpassed United States as the biggest importer of crude oil back in 2017 and continues to do so in the current time.
Due to their high demand in the production industry where consumption of crude oil is relatively large, China’s crude oil markets is one to watch.
Traders may consider paying attention to China’s demand for industrial production as it will impact the price of crude oil if there is any indication on the need for more or less crude oil.
4. Crude Oil Futures Listed On Shanghai International Energy Exchange (INE) in 2018
In the first year of the internationalisation of China’s futures market in 2018, crude oil futures were listed on Shanghai International Energy Exchange (INE), Since then, trading volume and open interests are rising steadily. An increasing number of businesses and overseas institutions have participated in the trading and the structure of market participation has been continuously improved.
As the first international futures product induced in China, the INE futures is traded to overseas investors and has attracted much attention by overseas institutions and investors.
5. Price Highly Correlated With International Crude Benchmark Prices
According to a report from INE, Shanghai crude oil futures is highly correlated with CME WTI crude futures, ICE Brent crude futures and DME Oman crude futures. The fluctuation of basis spread objectively reflects the change of supply and demand relationship between China and other regions, effectively guides resources allocation and guarantees the national energy security.
The global oil demand shock due to the COVID-19 pandemic has sent markets and benchmarks into turmoil. In the height of the demand shock, WTI traded at negative values while the divergence in Middle Eastern benchmarks was laid bare. Excess supply of oil naturally gravitated to China, the biggest oil importing country in the world, increasing ‘spot’ activity in delivered barrels into the country. This, in turn, led to a flurry of activity on the Shanghai International Energy Exchange oil futures contract, which traded at a hefty premium to ICE Brent and DME Oman.
As liberalisation of the Chinese energy market continues, delivered oil market in China will grow in importance and the role of the INE contract will increase with it.
Start Trading Crude Oil Futures With Orient Futures Today
At Orient Futures, we provide traders and hedgers with access to the world’s major futures exchanges, including China’s market as we are a Chinese backed company.
We are an official MAS regulated broker as well as an official overseas intermediary, allowing traders to access a spectrum of futures and options in Chinese exchanges including the INE, DCE and ZCE.
With us, you can enjoy direct access to trading, clearing and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
Begin your journey of trading crude oil futures with Orient Futures here.