Analyzing the Oil Industry

Crude oil was hovering near $65 a barrel toward the end of 2021. If you can remember, consumer and producer price inflation had already begun creeping up. But then, in February of 2022, Russia invaded Ukraine. Soon enough, all energy prices began spiking. Later that March, oil hit its peak, and for the rest of the year, it trended downward. Why? Hedge funds anticipated a global slowdown in energy demand, and so they began unloading and even shorting energy futures. And although OPEC+ decided to cut production in October (due to estimates of slowing demand), oil prices continued to decline.

A Slick and Slippery Trade

The summary above barely scratched the surface in describing all of the recent events that took place in the global oil market.

And if you’re a day trader looking to take advantage of the crude oil market, it might have been advantageous for you to monitor the oil market from all major angles viewed by the industry.

In other words, a technical analysis approach would have placed you in a reactive position; whereas monitoring fundamental developments might have given you an edge over most technical traders.

Seeing the economic pieces in play might have helped you anticipate changes in the market, early enough for you to have taken a position on the right side of the market. Here are a few quick tips to help get you perched up to view the market from a fundamental angle.

Understand the Role Crude Oil Plays in the Global Economy

Let’s talk about crude oil specifically from an “energy” perspective. We say this because there are hundreds of different products made from petroleum products, from gas to golf balls to clothes and curtains.

Oil powers the globe. It fuels almost every form of transportation, from cars to ships and planes. It also plays an important role in generating electricity, heating homes, and filling those homes with hundreds of different products.

As an industry, crude oil creates jobs; jobs that help fuel jobs in other industries. For instance, farmers need diesel to run heavy equipment necessary to support the food supply chain; and food products must be transported to get to your local grocery store; etc.

In 2020, the world consumed around 100 million barrels a day. The average price of Brent crude was around $40 a barrel. That amounts to around $4 trillion a year. But then things changed when inflation crept up following the pandemic. And then in 2022, Russia invaded Ukraine, causing oil demand to spike to as high as nearly $130 a barrel. Ouch! We all felt it too at the gas pump.

The bottom line is that the global economy depends on crude oil for its most basic functions. So, when the global economy undergoes a boom or bust, its effect on crude oil prices are likely to be significant.

So, how do you monitor the global crude oil market? Here are a few pointers.

1 – Pay Attention to Global Economic Conditions

The world is heavily crude-reliant. If the global economy is experiencing growth, oil demand (along with oil prices) tends to rise. If global growth is expected to slow or recede, then demand for crude is likely to fall.

This is what happened in March of 2022, when analysts, expecting a global recession, became largely bearish on crude oil. If the economy isn’t moving much, there’s not much need for fuel, so the logic goes.

2 – Assess Supply and Demand

Still, you have to check the actual supply and demand expectations in the industry. Is oil production increasing, maintaining the status quo, or pulling back? Are there any disruptions to the global oil supply chain that can result in a shortage (meaning, potentially higher prices)? Or is there a surplus in oil?

When Russia invaded Ukraine, world markets anticipated a shortage in oil and energy products. Russia is the third-largest oil producer in the world. Disruptions due to war would invariably affect supply conditions and prices across the globe.

3 – Monitor Alternative Energy Developments

The more electric vehicles on the street and highways, the less demand for gasoline, which is a petroleum product. Still, in this early age of EV tech, crude is needed to generate the power supplying EV charging stations. But eventually, that may change.

Renewable energy aims to make the environment a cleaner and “greener” place. In order to do this, the world has to be less crude-reliant. As you can imagine, if alternative energy sources become more widely adopted, reducing crude oil demand, not only will crude oil prices fall, but the entire industry can see a decline. So, as a trader, you might want to follow developments in the green energy space to anticipate potential turning points in demand, whether in the near-term, or the long-run.

4 – Assess the Health of Major Oil Companies

For most futures day traders, analyzing the financials of an individual company and the health of an industry or sector may seem a bit remote. But if you plan on specializing in this industry (as in, you really really know what’s going on), it helps to monitor the profitability of the big energy giants. At the least, the state of their revenues and earnings can give clues as to the broader supply and demand picture (regional or global).

5 – Follow Energy News, Reports, and Trends

It’s a given: stay on top of news, reports, and trends. The next section will give you a few suggestions as to who you might consider following:

Which Industry Groups Should I Follow?

  • The Energy Information Administration (EIA) publishes reports on energy markets, oil production, inventory levels, and general supply and demand. The weekly EIA Petroleum Status report is one of the agency’s most important releases and has the potential to move markets.
  • The International Energy Agency (IEA) is a Paris-based intergovernmental institution that regularly publishes analysis and reports on global oil supply and demand.
  • The Organization of the Petroleum Exporting Countries (OPEC), the world’s largest “oil cartel,” controls a massive portion of the world’s oil production. OPEC releases reports on the global oil supply and demand on a monthly basis. Its reports also include industry forecasts, production data, and general industry analysis.
  • The American Petroleum Institute (API) is a national trade associate focused on the US oil and natural gas industry. It provides weekly reports and statistics on oil and natural gas production.
  • Rystad Energy is an independent energy research and business intelligence firm based in Norway. It publishes data on the energy sector, and focuses on energy industry analysis, price data, and energy company research.

There are plenty more industry groups, intelligence firms, and think tanks that may provide useful fundamental information. Look to other countries as well to see what kind of groups you may find there.

Following industry-published data can help you get a comprehensive view on the market you are trading. Plus, it can help you stay a step ahead of most traders and investors who don’t actively monitor the energy markets.

The Bottom Line

Following oil industry fundamentals can be an effective way to contextualize the crude oil market you may be trading from a purely technical basis. It takes a lot of homework, but the comprehensive insights fundamentals provide may give you enough of an edge to improve your short-term trading endeavors.



Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.