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Trading Crude Oil in the US


Jan 29, 2024
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Archaeologists have found evidence that people have been using crude oil since four thousand years BCE when ancient Babylonians used the deposits of crude oil that bubbled up from the surface as a caulk on their ships. Ancient Egyptians also used crude oil to help preserve the bodies of their dead during the process of mummification.

However, it wasn’t until the middle of the 19th century that a commercially viable oil well, known as Drake Well, was discovered in the US state of Pennsylvania. Although there had been earlier deposits of oil discovered earlier, it was considered a by-product until the true potential of oil was discovered. 

By 1859, crude oil had been used to make kerosene which was a clean and cheap alternative to its predecessor, camphene, which was made from turpentine and ethanol. Not only did it change the way people were lighting their homes, but the demand for kerosene triggered the oil rush and established a completely new industry that would change the world.

When Karl Benz invented the first motor car he used the low-cost by-product of the kerosene industry, gasoline, as a fuel source. Henry Ford took it one step further when he created the Model T in 1908 as this was affordable and could be produced in bulk.

The subsequent proliferation of the motor car continued to drive up demand for crude oil, and throughout the 20th century, more and more motorised vehicles were being produced, and more and more oil was being discovered. The Middle East proved a rich source of oil, but the US was already ahead when it came to developing the technology required to extract oil, so the US bought up extraction rights for relatively low sums. 

Crude Oil Trading in the US

The United States has continued to be a major player when it comes to oil supply, and as one of the biggest markets in the world, there are several different aspects to the industry itself, including:

  • Exploration
  • Production
  • Processing and refining
  • Transporting
  • Storing
  • Marketing

The US recently became the leading producer of oil in the world, overtaking Russia and Saudi Arabia with fifteen per cent of the total global oil output. Some of the most productive areas can be found in Texas and in the Gulf of Mexico, with North Dakota and New Mexico also contributing to the figures.

There are thousands of US-based businesses engaged in oil-based operations, with many subsidiary operations performing services for the oil industry, including seismic surveys, well construction, drilling, and others. There are also more public-facing markets such as the hundreds of thousands of service stations selling fuel, most of which operate as franchises of larger organisations. 

The Crude Oil Industry as an Investment 

Today, most of the world’s most vital infrastructures rely heavily on the ongoing availability of crude oil. This means that investing in oil can be a profitable choice in almost any economic climate, as the market is consistent and small fluctuations rarely lead to any major losses in the long term. 

However, it is these fluctuations that can make trading in crude oil a good choice for those that want to make some money from buying in to the industry. Because it is such a large market with interest in so many different sectors, there are a number of potentially winning strategies that investors can adopt, depending on their trading preferences and objectives. 

As with any industry, there are some securities that are more likely to get good results for investors, but research is the real key to success when trading in crude oil. Getting a good understanding of what drives the demand for crude oil is key to investment success, and there is plenty of information available to help prospective investors track a range of prices, including oil itself, derivatives such as options or futures, or exchange-traded funds. 

What Do You Need to Know About Trading Oil?

For those that are interested in trading in oil, there are a few important factors to consider when researching the markets

Supply and Demand: As one of the most truly global industries, crude oil is affected by the overall output of the world’s oil drilling operations, general global economic prosperity, and highs and lows in supply and demand dependent on global conditions. This can result in sharp rises in prices, as global demand outstrips supply, or declines when the price falls significantly, but the     overall trend is for largely sideways action year on year. 

Know the Markets: As well as different oil trading account types,  there are two major crude oil markets known as Brent Crude and West Texas Intermediate (WTI) Crude. They represent the different sources of oil that result in differing levels of sulphur and API (American Petroleum Institute) gravity.

Fracking and shale technologies have allowed WTI to increase its output in recent years, and this activity now forms the benchmark for much of the country’s crude oil trading. Tracking their long-term progress is one of the most important elements of understanding the crude oil industry.

Where to Trade: The US Oil Fund is the most popular choice for those that want to trade in crude oil equities, with an average of 20 million shares posted daily. Sector funds and direct investment in oil companies are ideal for those that want to maintain a diverse portfolio, allowing investors to take advantage of a range of different trends. 

Trading in oil can be hugely profitable, but investment success relies on thorough knowledge of oil itself, the investment landscape, and the way the market moves depending on a wide range of contributory factors. 

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