Trading oil for beginners in 2023
Some would say that oil makes the world go round. If this sounds like an exaggeration, you probably can’t deny that oil supports worldwide economic activity and growth. Although there is a shift to ecological energy solutions, oil and gas companies seem to recover ground lost during the pandemic era.
This blog aims to give you some valuable information that could help you navigate the oil market in 2023 and build your strategies aligned with your financial goals.
Some interesting facts about oil
Both crude oil (petroleum) and its refined components, known as petrochemicals, play critical roles in today's industrialised economies. People in ancient Mesopotamia used oil as mortar in construction, while others used it to waterproof their boats over four thousand years ago.
In the US, the native Iroquois tribe used oil to make war paint and mosquito repellent. Many years later (1859), the Seneca Oil Company drilled America’s first commercial oil well in Pennsylvania. According to data provided by the US Energy Information Administration (EIA), the top-3 oil-producing countries in the world are the US, Saudi Arabia and Russia.
WTI crude oil and Brent crude oil: What’s the difference?
Scanning a list of commodities, you may have bumped into the West Texas Intermediate (WTI) crude oil and the Brent crude oil. These are two of the most popular oil benchmarks in the world. Let’s see what the differences are.
What is WTI crude oil?
WTI crude oil is sourced primarily from the state of Texas and is one of the highest quality oils in the world, which is easy to refine. The oil then goes through pipelines to the US Midwest and the Gulf of Mexico, where it is refined. Cushing, Oklahoma, is where most of the physical exchange and price settlement for WTI takes place. Oil market analysts refer to Cushing as “the pipeline crossroads of the world.”
The WTI crude oil spot price slumped on December 9th 2022, trading at $71.63 and hitting a one-year low. Although it has gained some ground since then, the WTI crude oil spot price fluctuates between $73 and $81 per barrel in the first six weeks of 2023.
What is Brent crude oil?
Brent crude oil is an oil benchmark for over 65% of the world's oil contracts based on oil extracted mostly in the North Sea. Brent crude was discovered in the early 1960s and is now sourced primarily from the United Kingdom, Norway, Denmark, the Netherlands and Germany. Brent crude oil is not as light as its counterpart WTI crude oil, but it is more common.
Brent crude oil transportation costs are significantly lower than the WTI crude oil as WTI is produced in landlocked areas. In recent years, due to advancements in drilling and fracking techniques in the US, WTI crude oil has become cheaper than Brent crude oil. Prior to this, Brent crude tended to be cheaper than WTI crude oil.
In line with WTI crude spot price, Brent crude oil spot price dropped to $76.82 per barrel on December 8th 2022. After gaining some ground in mid-January 2023, its price slumped again on February 3rd, trading at $79.69 per barrel. Since then, its spot price has risen, reaching $85.57 on February 16th.
Oil prices in 2023: Going up or down?
Deutsche Bank’s economists expect the Brent crude oil spot price to end the year around the $80 level. In a report released on February 14th, they noted that “we see Brent at $75/bbl for H1 2023 before balances improve in H2 2023 to $80/bbl. We see recession slowing demand growth, but as China’s exit from zero-Covid occurred earlier than expected, there is less scope for ‘slingshot’ rebound in Q2 2023. By H2, global demand should rise to 1 mmb/d above H2-2019 level. We see excess supply sustaining downside pressure for H1, creating tension with OPEC’s policy bias, before demand recovers in H2 2023.”
On the contrary, market analysts at UBS are way more optimistic regarding oil prices in 2023. A UBS report published on February 14th said: “we believe two-thirds of growth in oil demand this year will come from emerging Asia, led by China’s reopening – which we think will lift global oil demand to above 103 mbpd in the second half of the year. We expect non-OPEC+ nations to provide only modest supply growth this year, adding 1.3 mbpd primarily from US oil production, but trailing oil demand growth of 1.6 mbpd this year. We maintain our positive outlook on oil as we continue to expect Brent to rise to $110 and WTI to $107 this year.”
OPEC expects global demand to rise in 2023
Delivering a speech at an energy conference in Egypt, Haitham Al Ghais, the Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC), said that the cartel “expects global oil demand to exceed pre-pandemic levels in 2023.”
He also added that “we see demand rising to 110 million barrels per day by 2025, citing the improving economic outlook in China as it reopens. The oil industry had been plagued by several years of chronic underinvestment. The oil industry needs US$500 bn of investment annually until 2045.”
Trading oil: Is it risky?
As with all financial instruments, trading oil involves risk. Trading oil without knowing its fundamentals could lead to mistakes. Mistakes could lead to the loss of hard-earned funds. Although trading may be a part of your financial planning, there is no reason to expose yourself to financial danger, especially if you are just starting to trade.
Beginner traders who don’t have the necessary experience should seek to empower their knowledge in order to build strategies in line with their financial expectations. There are numerous ways to learn some of the secrets of trading and to improve your decision-making ability. Some brokers offer comprehensive educational materials ranging from webinars and seminars to e-books and articles written by market experts.
Knowledge is the key to success. Take advantage of the free to access information that is available on the web and filter it to stay focused on your targets without jeopardizing your goals.
Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with expert traders. Watch and learn from live trading sessions.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.