What Are the Best Indicators for the Oil Market?
To be a good investor you have to understand when to invest in something and how long to hold onto it. In order to know these two key factors you have to create a reliable prediction mechanism. No one has a magic crystal ball, so you have to rely on data and market analysis. Usually oil traders and investors will look to leading market indicators to make smart trades. Oil is considered one of the best leading indicators for markets around the globe, but what is a reliable indicator for the oil markets?
This question isn’t an easy one to answer. The difficulty with answering this question stems from the assumption that because something was true in the past it will also be true in the future. Now, if a trend or cycle develops over several years, or even decades, then there is clearly a correlation.
Correlations are a great thing for investors and traders to identify, but always keep one thing in mind: Just because there was a correlation in the past does not mean that it will be true tomorrow. The key to success is understanding historical correlations, assessing the current market and being willing to accept the inherent risks.
Indicators That Warrant Your Attention
A great place to start your research is to go straight to the source: the OPEC Monthly Oil Market Report. Between that and the EIA markets data you can gain a general understanding of the market as it exists today. It provides a sound baseline of what market experts are tracking, and you can begin to make connections and draw conclusions using a few leading indicators:
Supply and Demand — Understanding the supply level around the world and the offsetting demand can help investors see if oil prices are going to rise or fall. In general, supply with unchanged or declining demand will trigger a price drop. The opposite is also generally true: As supply remains unchanged or decreases and demand increases then prices will increase.
In recent years the U.S. and Chinese markets have been the best places to look since they consume large amounts of oil in both end-users and consumer products. Be careful though; the world order is likely to change in this lifetime. China and the U.S. can’t grow forever. India and Brazil may become the markets to look for and become better indicators as their economies develop over time.
Capital Investments — Taking a look at what oil producers themselves are doing can give you a succinct view of how the oil market will perform in the near future. If oil producers are cutting spending across the board you can be confident that the market will be down. Cuts in capital expenditures signal that oil companies are expecting poor financial results for at least the next year. Once they begin to cancel or forego projects and investments you know you’re at a decision point as an investor.
Global Events — Knowing what goes on in the world, whether it’s directly related to the oil industry or not, can have significant impacts on oil trading and investments. Natural disasters, elections, political conflicts, war, and protests can have wide-reaching influence. If a high oil providing country is in political turmoil or a pipeline has a fatal leak, then you should be aware of the impacts on oil trading. This componen of tracking the market allows traders to get a holistic view of long- and short-term expectations.
The Real Twist
Unfortunately, markets are driven by human decisions. People determine if they buy or sell, manufacture more or cut down, and where to invest and pull out. If economics teaches us one thing, it’s that people are not as rational as we would like them to be.
That is why it is important to always check your data analysis against current events. If the markets are reacting to elections or speculating on Federal Reserve announcements there can be a spike in volatility in oil trading, but it could also signal a great time to invest. The key to success is researching the indicators, understanding the impact of global markets and economies and determining the level of risk you’re willing to accept.
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