Oil is a popular commodity amongst traders. The volatility provides unique opportunities not available with other commodities. While demand for staples such as grain is fairly inelastic, oil consumers tend to change travel plans as the price of oil fluctuates. This is evidenced during the traditionally travel heavy summers when consumers travel plans are heavily influenced by the price of gasoline.
The high price of gasoline can lead to significantly reduced demand which will negatively impact the price of petroleum. The price of oil is also dependent on the whims of producers, such as member countries of the Organization of Petroleum Exporting Countries, or OPEC. While most rational producers have incentive to regulate the production of oil, OPEC member countries have shown their willingness to harm their entire country’s economy to drive down the price of oil to reduce the number of competitors in the field.
OPEC Country Influence
OPEC countries are also mostly located in parts of the world that are historically known for their volatility further contributing to price fluctuations as they affect the certainty of production and supply. Production and prices are not the only factors affecting oil’s price. Natural and man-made disasters can have a significant impact on the price of oil. Terrorist attacks on oil supply lines and wild fires that rage beyond human control can cause sharp spikes in prices. This should be carefully considered especially by investors who short oil, as these events are hardly ever predictable and can lead to large and unexpected losses.
Keeping these facts in mind, commodity investors should approach oil trading cautiously. There is opportunity to profit enormously, but a trader is also subject to equal loss. Commodities are a part of a diversified portfolio, and more than one investor has been burned by placing all of their eggs in one basket.