Crude oil futures allow producers, refiners, consumers, importers and exporters to hedge their risk. On the flip side this opens up the market to speculators that are willing to take on risk to make a profit. In order to be successful in the futures market you will need a strong understanding of the futures market you’re looking at. Oil futures come in various grades and qualities. One of the most notable would West Texas Intermediate (WTI) Crude Oil. WTI Crude Oil is a blend of several U.S. produced light sweet crude oil. Light sweet crude oils tend to trade at a premium over heavy sour crude oils. WTI Crude Oil is one of the most common benchmarks to gauge oil prices and market sentiment.
Oil prices are heavily influenced by basic economic principles of supply and demand. Oil supply and demand is affected by various factors and economic conditions. These are things like wars, shortages, supply cuts, increased production, environmental disasters, economic policies, etc. Oil is also affected by seasonality changes. Demand is generally highest during the summer and winter months. A very hot summer or very active driving season (for summer vacations) can increase the demand for crude oil and cause prices to move higher. It is crucial to understand how news and data that is affects oil prices and the oil futures market.
Some good sources for general info would be the following:
U.S. Energy Information Administration
However, in the Finance Lab you have access to a lot more powerful tools. The Bloomberg terminal will provide you with the ability to receive real time market data as well as an abundance of news and reports around the oil industry. Below is some examples of how you can use the Bloomberg terminal and the market news it provides in order to anticipate changes in the market.
Data from the American Petroleum Institute has shown a 1.3 million barrel draw. This draw was larger than the previous weeks oil draw, unexpected increased demand has resulted in a rebound for oil prices.
Example 2: Political Instability
Increased violence and instability in Nigeria (Africa's largest oil producer) has resulted in an increase price in oil. Wars, violence and instability lead to uncertainty and potentially lower output in the regions affected.
Example 3: American Oversupply
President Donald Trump proposes a plan to sell half of U.S. Oil Reserves. White house put forward this plan as part of the new budget. The increase in supply has resulted in a lower market price for Oil.
Natural Gas futures just like Oil, are heavily influenced by the laws of supply and demand. Production of natural gas has been rising steadily since 2011. We can approach the topic of natural gas from supply side and demand side.
Looking at natural gas from a supply side perspective, it is important to keep in mind that the infrastructure behind natural gas is very restrictive. As a result the supply curve for natural gas looks relatively inelastic. Regardless of price, supply is generally steady. Factors that affect supply price would be production, net imports, and storage levels.
The demand side however is affected by various components. Weather, economic conditions, and alternative fuel sources all have an effect on natural gas futures. Natural Gas is primarily used for electrical power generation. This is moreso relevant now due to the lower price of natural gas compared to coal. Natural Gas is also used for industrial applications, it can be used to produce fertilizer, chemicals and hydrogen. Finally natural gas is also used for residential and commercial heating.
Natural Gas price movement is highly sensitive to changes in weather. Weather is the primary factor in price volatility for this commodity. Gas prices follow a seasonal pattern and are higher in the fall/winter months. As you can infer this is due to higher demand for heating purposes.
Yearly Breakdown
Below is data pulled from the Bloomberg Terminal comparing market price of Natural Gas with average temperatures in North America. As you can see a seasonality pattern exists between Natural gas price and temperature. This is due to peak demand for natural gas being in the fall/winter months. Further supporting this observation is a chart below that shows EIA's demand for Natural Gas. You can see demand peaks in winter months and as a result so does natural gas market price.
2013 - 2014
2014 - 2015
2015 - 2016
2016 - 2017
Overall Comparative Look: 2012-2017
When you combine all the above charts together, you can see that January 2014 is a textbook example of seasonality and natural gas pricing. If we dig deeper into that data we find out that during that period the average temperature was 30.3 degrees Fahrenheit. Out of the 4 periods examined here, this is the only one lower than the 20 year average.
Average Temperature for January in the Contiguous United States
| Date | Temperature (C) | 20 Year Average (C) |
|---|---|---|
| January 2014 | - 0.94 | -0.89 |
| January 2015 | 0.56 | -1.06 |
| January 2016 | 0.11 | -1.06 |
| January 2017 | 0.89 | -1.06 |
Data is sourced from NOAA National Centers for Environmental Information, State of the Climate: National Climate Report for January 2017, published online February 2017, retrieved on July 12, 2017 from https://www.ncdc.noaa.gov/sotc/national/201701.
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