From The Free Forex Encyclopedia
Oil is a substance that is used for power and energy in order to run all the machines that we humans use. It is normally referred to as petroleum. It is important for consumers because they depend on oil for everyday activities. Naturally, companies also need oil to run their machinery and keep up production.
However, like other commodities on the market, not all regions can produce the same amount of oil. Thus, the oil market is created in order to match supply and demand of oil. Oil is traded through the purchasing and selling of oil futures. Futures are contracts that carry an obligation between two parties to make a transaction in the future at a predetermined price and date. Such contracts are standardized in terms of quality, quantity and transaction date and are traded on regulated futures exchanges. The main exchange markets for crude oil are the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE). These exchanges are regulated by the Financial Services Authority (FSA) in the UK and the Commodity Futures Trading Commission (CFTC) in the US. The different types of oil that are produced also affect the way it is traded and where it is traded. As it is, when people talk about oil, they normally refer to crude oil, which is the type most traded the most on international markets.
The biggest consumers of crude oil are (in millions of barrels per day):
United States = 20.5 China = 6.5 Japan = 5.4 Germany = 2.6 Russia = 2.6 Canada = 2.3
This shouldn’t come as a surprise – these nations all rely heavily on manufacturing and industrial production, and energy consumption. At the same time, the US, Canada, Russia and China are also some of the leading producers of crude oil. Of course, the biggest producer in the world is Saudi Arabia, with neighboring countries like Kuwait, Iran, UAE, and Iraq also being major producers of oil.
There are several factors that influence the trading of oil. For one, global demand plays a major role in determining the price of oil. If demand is high and business is booming, production may pick up, which could lead to an increase in the demand of oil. The weather can also play a crucial role as it can affect the dynamics of supply and demand. Natural disasters could hinder the production of oil, which in turn could cause oil prices to rise. Of course, politics always plays a major role in crude oil – the wars in the Middle East are an example of this. Oil trading can also be influenced by how investors view the state of the dollar. Take note, oil is sometimes used as a hedge against inflation. Also, always remember that the crude oil is bought and sold in US dollars, the movement of the USD can affect the pricing of oil.