When you’re making exchange traded fund (ETF) investment decisions, it is important to have all the information at hand so that you will make an informed decision. For the oil market, it could be to your benefit to get acquainted with oil price indicators.
Informed consumers won’t be surprised by shifting trends in crude oil and refined products, but you’re even more better off if you recognize the price pressures at the refining level, comments Brad Zigler for HardAssetInvestor.
Here are just a few; for the rest, stop by the article, because it’s well worth a read:
- Oil refining margins. Different refiners have different business models that will yield different goal projections. For instance, a lighter distillate refinery has a 3-2-1 “crack,” which is a standard mix of three barrels of crude oil yields two barrels of gasoline and one barrel of heating oil. A middle distillate are set at a 2-1-1 crack. Depending on the economic well-being of the economy, refineries will move to a light distillate crack in good years and shift to a middle distillate at poorer times.
- Average daily volume and open interest. On a week-to-week basis, an increase in volume usually adds optimism to a trend, whereas a decline may be a bearish sign. When open interest, or the number of unliquidated contracts, or potential volume, piles on, traders will rush the market, but a declining open interest translates to a liquidating market.
- Heating oil/gasoline spread. During winter and early spring, heating oil tends to have a premium over gasoline, but heating oil trades at a discount in the summer driving season.
- WTI contango/inversion. If near month contracts bid higher than the price of later deliveries, there is not enough physical oil to carry over, which causes “inversion,” or “backwardation” and results in higher prices. The opposite – lower prices in front months versus higher prices in later deliveries – is known as “contango,” which indicates a well-supplied market.
Although the trend-following strategy doesn’t kick off a buy signal until a position has moved above its 200-day moving average, by getting familiar with the signals in oil, you can learn to anticipate certain events and prepare yourself for action.
For more information on oil, visit our oil category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.