Published On: Mon, Sep 28th, 2020

How to Read the Oil Futures Market

Share This

If you own oil futures, you probably wonder about the most recent events that affect crude oil prices between now and the middle of 2021. Traders have a lot on their minds right now, especially with the continuing COVID pandemic, worldwide political turmoil, and the upcoming U.S. presidential election. All those events and more have a direct impact on the price of crude and the value of futures contracts. Here’s a quick overview of recent price action in the oil futures market, along with advice for traders who want to minimize losses.

COVID is Not Going Away Yet

After a short period of decline in late summer 2020, the coronavirus made a return in September. The unexpected news sent barrel prices down to the $35 level, which they hadn’t touched since the beginning months of the crisis. Now, many institutions and individuals are more wary of every apparent improvement in the COVID situation. Don’t expect a full turnaround until infection and death statistics reach lows and stay there. Likewise, don’t expect a potential vaccine to erase the danger and uncertainty right away, as it’s still in development.

Stay Informed About Rollover Dates

An oil rollover for account holders is a cash adjustment that takes place in their accounts. It’s usually not a large amount, but if you are an active trader, total rollover adjustments can be substantial. The goal is to always know when your contract is about to expire. If you want to let it expire without replacing it, let your broker know as soon as possible. Otherwise, no matter how the market is performing, you could incur a fee and be automatically placed into a new position, even if that’s not what you want.

Recent Price Action Reveals a Lot

After a brief drop into negative territory at the beginning of the viral pandemic, per-barrel numbers hovered between the high teens and $25 up until early May. Then, a very slow increase took place through late August, when the value hit $43. But the bad virus news at the start of September put a damper on the buildup and sent prices back down to the mid-thirties once again. After mid-September, based on better news and traders who continued to be bullish on the long-term outlook, the numbers went back up to $41 per barrel. Where they go from that point is dependent on dozens of factors.

Long-Term Trends Look Good

Even with all the short-term negativity, like supply gluts, decreased worldwide demand for crude and fuel oil, and sluggish economies, there is room for optimism. The caveat is that the positive outlook is very long-term, perhaps as long as three or four years. If you’re the type of investor who can deal with such a time frame, then you’ll likely earn rewards for your patience.

Here’s the short version of the long-term oil pep talk: COVID won’t last forever. Global economies will eventually recover whether there’s a vaccine or not. That means travel and manufacturing will return at least to pre-2020 levels and possibly higher. Nations that are maintaining vast crude reserves during the crisis will deplete some of those supplies in time, which puts upward pressure on the international per-barrel price. And once China, the U.S., and Europe’s economic situations return to normal, those three largest consumers of crude and refined oil will no doubt bid prices back up. The hope is that per-barrel values reach back up to the $60 to $75 levels. In fact, anything above $70 would be considered an almost total recovery.

OPEC is Still a Major Factor in the Global Market

The OPEC nations are no longer the world’s dominant force in the oil sector, but they’re still players. Recent meetings of the group’s leaders were focused on making sure that member nations stick to their promises to keep crude production low enough to maintain a price level that brings some much-needed funds into national treasuries. A few renegades, like UAE, are currently serving penalties due to their over-production surges that kept OPEC from meeting its stringent production cuts.

What is the Market Trying to Tell Us?

If anything, the global marketplace for crude is showing signs of indecision. COVID, and all its deep economic effects, has been the primary factor in this year’s price action. Until the pandemic is under control, traders had best follow the news and closely watch how the U.S., Europe, and China respond to the virus. When the situation fully turns around and business activity returns to some semblance of normal, the futures markets will truly be out of their slump.



Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>