What Investors Need to Know about Crude Oil

If past eras could be characterized as the Stone Age, Bronze Age and Iron Age, then we currently live in the Crude Age. And just like “The stone age did not end because the world ran out of stones, … the oil age will not end because we run out of oil” (in the words of a Royal Dutch/Shell researcher but made famous by a Saudi oil minister in 2000). Rather, the Crude Age will finish not because we run out of crude oil; but because technological progress will lead to its diminishing importance.

But until technology will give us replacement products, we will continue relying on crude oil as a source of energy for our cars, boats and planes, and for our electricity; as the material with which we make many of our roads; as the source of the plastic that has filled our lives and is now rapidly choking our waterways and polluting our seas; and as the raw material for many, many industries. And while this is the case, the state of crude oil markets will be closely bound to the state of the world economy.

Rising oil prices can upset trade balances (thus, affecting exchange rates) and cause inflationary pressures (with consequences for interest rates). They lead to higher transport costs, directly raising consumer prices and indirectly, making inputs more expensive.

Higher oil prices make it more expensive to produce electricity with oil, which leads to more use of natural gas for electricity generation, which makes nitrogen fertilizers that are also produced from natural gas more expensive… in turn raising farmers’ costs. All this goes to show how pervasive the role of crude oil markets in our current Crude Age really is… and how incomplete any investment strategy is if it does not include crude oil in one way or another.

Crude Oil Opportunity for Investors

Crude oil is not only terribly important for the world economy, it also offers great opportunities for investors. Of course, like any other asset class, investors have to ensure they have a good understanding of the market and what drives it. Politics is one important driver – the United States, Saudi Arabia, and Russia are the leading producers of oil, followed by Iraq, China, Canada and Iran. Any headline political news thus is more likely than not to have an effect on crude oil prices.

Financial markets are another driver, given the fact that crude oil is (and deserves to be) an important part of any well-diversified investment portfolio. There is a lot of short-term trading in crude oil markets, and technical analysis is of great help in deciding when to buy or sell.

For a futures market trader, crude oil provides fascinating opportunities. You can trade on the long-term fundamental trends. Or short-term on technical signals. Or price differences between different energy contracts. Or discrepancies between oil prices and other asset prices (e.g., the stocks of energy-producing or energy-using companies; or exchange rates; or other commodity assets such as palm oil).

You can even trade along the forward curve, that is to say the way that nearby oil contracts behave as compared to oil futures contracts with a further-away expiry date. Crude oil markets are very liquid and very active, and for a keen trader, every day brings new opportunities.

This is why ICDX is proud that for the first time, it will bring a crude oil futures contract to Indonesia. We hope it will prove a valuable addition to the forex and commodity contracts that are already available.