Understanding & Investing in Oil – An Overview

Wednesday 14 March 2012 - Filed under investing

Overview

The oil market is one of the most traded commodities in the world.  Oil forms a fundamental part of the modern transportation and manufacturing system.  Trading this commodity successfully depends on being able to understand the supply and demand situation; for oil as a commodity and oil as an investing asset.  Markets behave in a very simple way; more demand than supply increases prices and more supply than demand decreases prices.

Demand

From the above graph it is clear that demand for oil within ODEC [highly developed nations in North America and Europe] has declined over the past decade while demand from developing nations has increased.  This means that to understand the oil market and successful predict future prices, one must have a good understanding of where the economies of developing nations are headed.  If a world wide recession were to heavily impact developing nations then there would be little or no growth in the demand for oil.

Supply

The above graph shows that the total increase in the supply of oil has been slightly increasing over the past decade: roughly inline with demand.  Just as in demand, the majority of the increase of demand for oil has come from developing nations.

Conclusion

Demand for oil changes much faster than the supply. After the recession in 2008 world wide demand for oil decreased for a number of years but supply continued to increase.  After the crash of the U.S. housing market the oil price crashed as demand suddenly decreased.  The oil market is conceptually simple, as demand exceeds supply then prices increase and visa versa.  The complexity in the oil market comes from trying to predict future demand and supply of oil.

[the above stats were found at this site.]

If you have any questions don’t be afraid to ask them below in the comments section!

2012-03-14  »  Juan