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The cheap price of Crude Oil: Is it the right time for long positions?

07.04.2020

Crude oil is one of the most attractive commodities for both speculators and investors. Its high volatility has always attracted retailers and large financial sharks from hedge fund rankings. The situation in recent weeks is very reminiscent of the decline since the beginning of 2016, after which within half a year oil doubled its price.

Recent dramatic downturns have pushed the price of crude oil short to under $20 a barrel, and the market has entered a period of unprecedented destruction of demand. The numbers vary, but it looks like daily consumption will plummet by about 20 million barrels in April, in response to the global stay of people at home and planes left on the ground.

Currently, crude oil continues to be traded near its last 18-year low. One of the reasons is the destroyed demand, but the real pressure comes from on-going production. Saudi Arabia and Russia are stepping up production and are in a state of price warfare, and the deal made by the Organization of the Petroleum Exporting Countries (OPEC), which aimed to limit the production, has failed.

At such low prices, the market obviously expects some manufacturers to be forced to cease production. As soon as demand begins to recover gradually, the path for oil price rise will practically be cleared.

With that in mind, we are already seeing investors and traders, who are not normally involved in the oil market, buying oil. But caution must be exercised, as this trade, like every other, carries the risks of further falling prices, or even if prices stabilize and begin to recover.

The table below outlines the damage magnitude to the price of oil, the shares of companies operating in the sector and the value of the currencies most affected by the commodity price since January 17, when the coronavirus became a concern for most countries outside China.

Trading instruments

There are a number of stories about how investors and traders manage to make money from buying crude oil on the spot market by keeping their positions open for a few months and then selling it back to the market at a higher price. This example is great if the price of oil can make its way up in the next few months.

If the appreciation slows down and takes more time, then the daily swap rates (interest) would accumulate. Swap rates are not are not large, but when the position is held for a long period of time, they become a considerable cost. Swap numbers are only applicable to crude oil traded on the spot market.

There are no daily swaps for trading maturing oil, but positions may be held until the maturity date of the current contract, after which the same positions may be opened in a new contract with future maturity. Neighboring contracts do not always have the same prices - something that the price of spot oil overcomes.

A good alternative to the crude oil trade could be the strong and well-capitalized oil companies, capable of withstanding the current pressure to get stronger on the long run.

The currencies with the strongest movements relative to those of oil are the Norwegian Krone (NOK) and the Russian Ruble (RUB), since both countries rely mainly on exports of the raw material.

Ideas for crude oil trading in BenchMark

The tables below include sample financial instruments that are offered under excellent trading conditions on the MetaTrader 5 trading platform. BenchMark offers spot oil and maturing oil of the WTI and Brent varieties, as well as CFDs on shares of oil companies:

Crude Oil:

  Swap Maturity Commission
WTI Yes No No
Brent Yes No No
USOIL No Yes No
UKOIL No Yes No

 

Oil Companies

Name Code in MT5 Live Prices Commission
Exxon Mobile #ExxonMobil Free $0.05/share
Total SA #Total Free 0,10%
Chevron Corp #Chevron Free $0.05/share

 

Currencies

Name Code in MT5 Medium spread Commission
Euro/Krone EURNOK 35 No
Dollar/Krone USDNOK 40 No
Dollar/Ruble USDRUB 450 No