How to Successfully Trade Crude Oil’s Volatility

Crude oil prices are swinging like crazy.

The mainstream is lost, writing bullish news one day and bearish the next! It’s no wonder traders are confused.

If you bought crude a fortnight ago, you would have made a lot of money — and then lost it all last week. If you bought crude last week, you wouldn’t be happy today either.

If, on the other hand, you bought crude early last month you’d be in profit.

Crude’s volatility doesn’t make our job easy. But it doesn’t make it impossible either. You can successfully navigate through the tough times, whether you’re a trader or a longer term investor.

I’ll show you what I mean…

Trading and investing — how to play the game

Trading isn’t for everyone.

Prices fluctuate rapidly on day to day basis. For example, a militant attack in Africa may send crude prices higher. Alternatively, a jump in the US oil rig count will push crude lower.

The ongoing news is called ‘noise’ in the industry. That’s because it distracts us from the bigger trend at play.

With so much information, traders generally need to be alert 24 hours a day. That is a full time job in itself. Traders tend to ride the ‘trend’, which is typically the right side of the market on a day to day basis.

Investing is quite a bit different. You don’t need to be alert 24 hours a day. That means you can also sleep a little easier at night.

You see, the noise only drives the short term story; it doesn’t determine the overall trend. The fundamental story (supply, demand, and geopolitics) drives the medium to long term trend.

Fundamental analysis looks at all the available noise, and paints a big picture story.

I spend most of my time performing fundamental analysis for subscribers of my paid investment service, Resource Speculator. The goal is to look beyond the day to day news, providing one simple overarching view. The overarching story should make the decision of where to invest — as investors, not traders — easier.

My ‘big picture’ view often goes against the short term trend, and my outlook may not be favourable either.

It doesn’t bother me.

I tend not to care about short term volatility, or the market noise. As long as my overarching investment thesis doesn’t change, there’s no need to lose any sleep. The really big profits are tied to the medium to long term trend.

If you’re an investor, you too should overlook the noise. Forget about the day to day headlines in the mainstream media.

Focus on what matters: the big picture at play. That will help you know when to buy low, and sell high!

So when should you be buying and selling crude?

What’s the big picture for crude?

Crude’s big picture story is simple: it stinks. That’s really all you need to know.

On the demand side, the world economy is shoulder deep in debt. Borrowing more is not creating real economic growth. Furthermore, higher taxes and ever-so-burdensome regulation have destroyed the world economy. The combination is seeing lower demand for crude.

On the supply side, a lot more crude keeps being brought to market.

Despite the day to day news, hype, and volatility, there’s no urgency to buy the best crude oil stocks today. From Reuters on 16 September:

“Crude futures are taking on an increasingly bearish appearance,” said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.

For WTI, “this can potentially expedite our expected trip south to the $39 area,” he said.

Oil slumped after a source familiar with Iran’s tanker loading schedules said the third-biggest OPEC producer raised crude exports to more than 2 million barrels per day (bpd) in August, nearing pre-sanctions levels.

As a trader you could make — or lose — some serious money if crude drops another $3.56 per barrel…or surges into the OPEC Algiers meeting on 26–28 September.

But as an investor, this volatility is insignificant to the big picture outlook.

If you’re an investor, focus on what matters most — the big picture story. That points to lower crude prices in the months ahead.

Unless you’re hunting the speculative end of the crude oil market, where the results typically depend on company fundamentals, I recommend being patient. I expect a fire sale among oil producers in the months ahead. If you pick the best crude stocks, you stand to make the most money by holding them for a few years!


Jason Stevenson,
Resources Analyst

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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