Oil Trade Idea May 2020

The price of Oil has been a big hit in the news recently after hitting $0 a barrel. Many traders and even amateurs trying to take a piece of the cake but in reality, the cakes already gone. If it’s been in the news it’s too late, just like what happened with Bitcoin.

Many investors and the general public forget a rule of thumb when it comes to the price of oil and that it’s mainly driven by two factors:
 

How does supply and demand affect the price of oil?

Well, just like anything when there’s more demand for a product what generally happens? The price goes up. When there’s less demand for a product, the price goes down to attract new customers. With supply it’s a little different. When the supply of a product increases the price goes down, but when supply decreases the price goes down.

In the case of oil and the global COVID-19 pandemic we can see the global supply of oil rise. How do we know? Well, businesses around the world have been forced to close. This includes the likes of factories, manufacturers and a big one for oil airlines. If all these places are closed, who’s using oil? If everyone isn’t allowed out and there’s less cars and trucks outside driving, who’s buying petrol?

What’s happened is demand has decreased (no one buying oil or petrol) and supply has increased (lots of oil leftover because no one buying) overall dropping the value of oil significantly.

The current problem of the market sentiment is that people believe because the price of oil is “low” currently sitting at roughly $26 a barrel the general consensus think it can’t go lower and that’s where they’re wrong.

As they can see the price of oil can hit $0 showed this year and over the past 40 years it has hit lows of around $10 before going on a rally.

As traders and investors if you’re looking to trade oil you need to identify signs of supply decreasing and demand increasing for a bull run. This can include things like lock downs being lifted across the globes, air travel being allowed back to run normally and factory work which requires oil to be allowed back in business. If these signs aren’t looking good and lock downs are forced to become stricter you can expect risky assets like Oil and stocks to continue falling in price. But when those signs are looking hopeful we may see a great oil run in the future.