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Is WTI Crude Oil's 25% Crash Just the Beginning?

June 06, 2019 11:31

The price of WTI crude oil, an international benchmark, suffered its worst decline in six months during the month of May. With the black liquid falling 25% in just 43 days (as of June 5), it has forced the oil kingdom of Saudi Arabia to pledge it will rebalance the market - possibly creating some very interesting trading opportunities for the months ahead.

Trading WTI Crude Oil

In this article, we explain why WTI crude oil has collapsed, the next major event you need to know about and how to trade the notorious volatility of the oil market. Let's begin!

Why Have Oil Prices Collapsed?

Oil markets are notoriously volatile as the price of oil, such as the West Texas Intermediate type (WTI), is influenced by a variety of economic and geopolitical factors. The long term chart of WTI crude oil below shows its historical volatility:

Source: Admiral Markets MT5 Supreme Edition, WTI, Weekly - Data range: from Dec 24, 2006, to June 5, 2019, accessed on June 5, 2019, at 5:54 pm BST. - Please note: Past performance is not a reliable indicator of future results.

However, while the oil market has many different influences on its price, most of the world's oil supply is still controlled by just one cartel - the Organisation of the Petroleum Exporting Countries (OPEC). And, it has been the actions of this cartel that has heavily influenced recent prices in WTI crude oil.

At the G20 summit in Buenos Aires in December 2018, OPEC and Russia both agreed to cut 1 million barrels of oil per day from the market, in an attempt to stimulate oil prices. The planned cuts started at the beginning of 2019 and were to last six months. As supply was drastically limited, the price of WTI crude oil rose significantly - almost 60% higher from the beginning of the year to its 2019 high of $66.60 made on April 23.

Since then, the price of WTI crude oil has fallen nearly 25% as fears of slowing global growth gripped markets. Comments from Russia's top oil producer that it would oppose extending the production cuts with OPEC also caused traders to bail on their 'long' positions. The next OPEC meeting is set for the end of June, or the beginning of July and could be decisive in the next major move of WTI crude oil leading to the question - how do you trade such volatile markets? Let's find out!

How to Trade the Volatility of WTI Crude Oil

The daily price chart of WTI crude oil for the past few years, as shown below, shows just how volatile the oil market can be:

Source: Admiral Markets MT5 Supreme Edition, WTI, Daily - Data range: from Oct 16, 2017, 2006, to June 5, 2019, accessed on June 5, 2019, at 6:08 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In such volatile markets trading indicators such as Bollinger Bands can be quite useful in identifying the state of the market, as well as support and resistance levels where the market could turn.

To plot the Bollinger Band indicator on your chart, select Insert -> Indicators -> Trend -> Bollinger Bands, from the top tab in your MetaTrader platform.

Source: Admiral Markets MT5 Supreme Edition, WTI, Daily - Data range: from Aug 10, 2018, 2006, to June 5, 2019, accessed on June 5, 2019, at 6:25 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the above daily chart of WTI crude oil, the Bollinger Bands consist of three lines - the upper band, the lower band and the middle 20-period moving average. The upper and lower band are two standard deviations away from the price which is essentially a measurement of volatility.

There are many different Bollinger Band strategies a trader could use. However, they are all based around the following basic principles:

  1. If the bands come together the market is in a consolidation.
  2. If the bands widen or move apart, the market is in a trend.

Currently, the above chart shows the Bollinger Bands widening which means the market is in a trend. Some traders may use this as a bias to trade with the trend and may use the middle band, the 20-period moving average, as an area to consider long or short positions.

With Admiral Markets you can speculate on the price direction of WTI crude oil by using a CFD (Contract for Difference). One of the benefits of this product is the fact you can go long or short on the market.

Conclusion

While WTI crude oil has already moved a considerable amount, more volatility could lie ahead as we draw closer to the next OPEC and Russia meeting. Testing your trading strategies, indicators and skills can help to optimise real-time trading decisions. However, the first step is to use the right platform which offers access to the right trading products.

With MetaTrader 5 you can trade on multiple asset classes, as well as access superior charting capabilities, free real-time market data & analysis, the best trading widgets available, and much more! To download MetaTrader 5 now, click the banner below and receive it for FREE!

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INFORMATION ABOUT ANALYTICAL MATERIALS:

The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

1.This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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4.The Analysis is prepared by an independent analyst Jitan Solanki, Freelance Contributor (hereinafter "Author") based on personal estimations.

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