Oil prices are volatile and gyrate daily as market participants jockey for position. Oil, like most commodities, is driven by supply and demand. Over the short-term, market movements are a function of sentiment. To measure supply and demand as well as sentiment, you can evaluate a few different reports which will provide you with the information you need to effectively trade oil prices online.
One of the best ways to invest in oil is to understand the fundamentals of this commodity. Oil is traded around the globe and is considered a fungible product. The United States is the largest consumer of oil using more than 20-million barrels a day and the US is now also the largest producer of oil generating nearly 12-million barrels a day.
One of the best ways to gauge production, consumption, demand as well as inventories is to evaluate the weekly forecast produced by the US Department of Energy. Every week, the Energy Information Administration produces a report that shows the inventory levels as well as the demand and production levels of oil in the US. This report is widely evaluated by oil analysts who attempt to forecast inventory levels on a weekly basis.
The Commitment of Traders report is generally released every Friday, for positions that are held up to the prior Tuesday which means that the report is relatively timely. Many traders’ use this report as a contrarian report which is a gauge of sentiment.
For example, when hedge funds are very long on a position, then you can assume that the markets might be offside’s and a liquidation could arise. On the other hand, if managed money is very short, prices could squeeze higher.
Here is an example of how on December 11, 2018, the commitment of traders report showed that managed money was significantly long 265K contracts compared to short positions of 43K. A forecast of warmer than normal weather generated a cascade of declines as hedge funds quickly looked to exit long position. Sentiment was very bullish and quickly turned bearish as hedge funds headed for the exits.
By using a combination of reports such as the Energy Information Administration report on inventories as well as the Commitment of Trader’s reports, you can use it to potentially help gauge supply and demand as well as market sentiment.