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OIL - BLACK GOLD or FAW? The influence of Covid-19

29.04.2020

There’s an abundance of brokers to choose from when trading the financial markets. Trader’s are often wondering: How do I choose my broker? And, What should I look out for?

The international oil market has experienced the side effects of the most recent world Pandemic. The commodity known as “Black Gold” has reached its lowest point since mid 1999 in the last days of April, with a 18% drop the WTI Crude Oil reached as low as $14.45. (Reference)

History

But let’s look at a brief history of Oil and why its been traditionally a go-to-product for traders throughout the history of trading.

Crude oil has been traditionally traded in very high volumes worldwide as its uses vary from refinement to diesel and gasoline to cosmetics, fertilizers and medicines. The impact of the price of oil is critical to the global economies and therefore in turn that means that it is open for high influences of commercial and political concerns.

But why is Crude oil so valuable?

Being one of the world most traded commodities (including its derivatives), Oil is commonly used for hedging purposes as well as diversification of a traders portfolio and of course price speculation.

According to the IEA (International Energy Agency) and due to the growing world population, the demand for oil will be continuously increasing in the next few years. Additionally despite the massive hit the aviation and transport industry have experienced due to the Covid-19, upon recovery, the needs will be even higher.

In the next 5 years, the IEA forecasts:

• Increased demand globally by strong economies
• China and the US will be driving the growth of Oil demand
• Whilst the capacity of OPEC is slowly growing, there will be a focus of attention on countries such as the US, Brazil, Canada as well as Norway that will be contributing to the growth of Oil supply.
• By 2023, the oil market might be tightened, because of the price volatility risk increasing.

What does history show us?

Crude oil, historically, reached its peak in July 2008 at $145.31 per barrel whilst the lowest of all time was in February 1946 with a record low of $1.17. During 2018, the average price per barrel fluctuated in the $67 region.

Let’s take a look at some of the major events in history that have affected the Black Gold.

1862-1865, The US Civil war drove commodities pricing up
1865-1890, US drilling fluctuations cause oil prices to experience drastic swings
1890-1892, Oil prices fell as a response to the strong recession and strong Oil production in Russia
1894, The Cholera epidemic in Azerbaijan and Baku contributes to a spike in 1895
1920, The automobile industry causes drastic rise in oil consumption
1931, Prices hit record low as a result of the Great depression
1947, Post-war automobile boom leads to fuel shortages
1956, Suez crisis swipes 10% off the world’s oil market
1972, The peak of Oil production
1980, Supply warning causes demand spike pushing prices down
1986, Saudi Arabia increases production to regain market share
1988, With the end of the war, Iran and Iraq increase output
1999, Demand in Asia recovers after the 1997 crisis
2000, Oil demand rises in Asia as production stagnates
2007-2008 Global financial crisis causes prices to drop
2011, Arab spring civil war disrupts Libyan output causing prices to increase
2018, Steady growth followed by a sharp dropdown at the end of the year.
2020, Sharp drop due to the covid-19.

Key takeaways

The Crude oil history is evidently marked by economic as well as political events. Therefore if you want to tip your toes in the Oil markets, this highly traded commodity will provide a highly liquid asset with which you can use several strategies to trade. Focus on the fundamentals of the oil market and try to see what drives demand and supply.

History shows that whilst there might be ups and downs, Black Gold always seems to find its way back up. So shall it recover from the most recent pandemic.