What moves oil prices?
Learning objectives
Separate the supply-side and demand-side forces acting on crude prices
Read the weekly inventory reports and say what a build or a draw indicates
Build a calendar of the scheduled events that reliably move oil
Understanding supply
Oil is the most headline-driven instrument most retail traders will encounter. A single announcement can move it several percent, which makes knowing what to watch considerably more valuable than it is in a currency major.
OPEC and OPEC+. The Organization of the Petroleum Exporting Countries, together with allied producers including Russia, coordinates production targets among members controlling a large share of global output. Meetings are scheduled and their decisions on quotas are among the most reliable movers of crude.
Two things matter beyond the headline decision. Compliance varies, since a quota agreed is not a quota met, and analysts track actual output against stated targets. And as with central banks in Central banks 101, the market prices an expectation ahead of the meeting, so what moves price is the gap between the decision and what was already assumed.
US shale production. American output responds to price faster than conventional production does, because shale wells can be brought on and shut in relatively quickly. This creates a partial ceiling: sustained high prices tend to draw out more US supply, which then weighs on prices.
Geopolitical disruption. Conflict, sanctions, attacks on infrastructure and shipping route interference all remove or threaten supply. These are the moves that arrive without warning, and How to trade news events covers why unscheduled events are a sizing problem rather than a trading opportunity.
Outages. Refinery fires, hurricanes in the Gulf of Mexico, pipeline failures. Usually temporary, occasionally significant.
Understanding demand
Global economic growth. Oil demand tracks industrial activity, freight and travel. Growth data from the largest consuming economies feeds directly into the demand picture, which is one of the few places where the macro material in What is fundamental analysis? applies to a commodity as directly as it does to a currency.
China specifically. As the largest importer, Chinese demand indicators carry disproportionate weight. Manufacturing surveys and import figures move crude in a way that equivalent data from smaller economies does not.
Seasonality. Northern hemisphere driving season lifts petrol demand through summer, and winter lifts heating demand. Real, and weaker than it's often presented, because it's widely known and therefore substantially priced.
Inventories
The most reliable scheduled mover after OPEC decisions.
Two weekly US reports:
- The API figures, released Tuesday evening UK time, from an industry body
- The EIA report, released Wednesday afternoon UK time, from the US government
The EIA report carries more weight. Both are scheduled and both routinely move price.
Reading them is straightforward. A build means inventories rose, indicating supply exceeded demand that week, which is bearish for price. A draw means inventories fell, indicating demand exceeded supply, which is bullish.
And as The big four: NFP, CPI, interest rates and GDP established, the market trades the surprise. A build against an expected draw moves price considerably more than a build that everyone anticipated.
The dollar relationship
Crude is priced in US dollars globally. So when the dollar strengthens, oil becomes more expensive for buyers holding other currencies, which tends to weigh on demand and therefore on price.
The relationship is real and it is a tendency rather than a rule. It's regularly overwhelmed by a supply shock, which cares nothing about currency markets. Treat it as background rather than as a signal.
Risk sentiment
Oil behaves as a risk asset. In periods of genuine market stress it tends to fall alongside equities, even when the stress has nothing to do with energy supply, because the mechanism is expected demand destruction rather than anything physical.
Which produces an occasionally confusing situation: geopolitical events can be simultaneously bullish for oil through supply risk and bearish through risk sentiment, and which force dominates isn't reliably predictable in advance.
Your oil calendar
Five things to have marked:
- OPEC+ meetings. Scheduled, and among the largest movers.
- EIA weekly inventories, Wednesday afternoon UK time.
- API weekly inventories, Tuesday evening UK time.
- Monthly outlook reports from OPEC, the EIA and the International Energy Agency, which revise demand and supply forecasts.
- Major economic data from China and the US, for the demand picture.
Building a trading routine argued for checking the calendar before every session. On oil this matters more than on most instruments, because the scheduled events move it further and the unscheduled ones can move it a great deal further.
How to get started
Oil is genuinely tradeable and it is not a beginner's instrument.
The drivers are comprehensible, which is part of the appeal. A production decision or a supply disruption is a clearer story than an interest rate differential. But comprehensible is not the same as predictable, and the combination of large contract sizes, high volatility and headline sensitivity means an unanticipated announcement can produce a move far outside anything your stop distance assumed.
The instrument map: forex, stocks, indices, commodities, metals, crypto CFDs put oil in the later group for exactly this reason. The right time to trade it is when your sizing process is stable enough that a three percent gap against you is survivable rather than significant.
Key takeaways
Supply is driven by OPEC+ decisions and compliance, US shale responsiveness, and geopolitical disruption. Demand is driven by global growth, Chinese import activity and seasonality
Weekly inventory reports are the most reliable scheduled mover after OPEC. A build is bearish, a draw is bullish, and the market trades the surprise against consensus
A stronger dollar tends to weigh on oil since it's globally priced in dollars, but a supply shock will override the relationship entirely
Oil's drivers are comprehensible without being predictable. Combined with large contract sizes, that makes it an instrument for a stable sizing process rather than a developing one