By Elad Mor
The oil industry plays a very important role in the global economy and in recent years we have seen oil prices experience substantial highs and lows resulting from geopolitical events. For example, if we look back to January 2011, oil prices during this time peaked at $100 a barrel for the first time since October 2008 amid worries about political unrest in Egypt.
Fast forward to December 2014 and crude oil hit its lowest price since 2009. Oil prices have plummeted by as much as 50% in the last 6 months, with prices until recently, at below $50 per barrel and future prices very much dependent on oil supplies and the world’s geo-political situation.
Many traders know that the mere hint of political unrest can send the price of oil soaring as illustrated by recent news of air strikes by Saudi Arabia in Yemen. At the time of writing in March 2015, concerns that that fighting was spreading caused the price of oil to jump 5% to almost $60 per barrel amid concerns that the Yemen conflict might disrupt cargoes on the bordering Bab el-Mandeb Strait, where 3.8 million bpd of crude oil flows.
Hence, if the conflict in Yemen escalates, it is likely to continue to affect global oil prices and could potentially cause a spike. Conversely, if the U.S. and Iran agreed to a nuclear deal and the embargo on Iranian oil exports was lifted, this could cause prices to be driven down. Tehran is keen to recover market share forfeited under the U.S. led sanctions that have curbed its crude exports to just 1 million barrels per day from 2.5 million bpd in 2012.
In terms of exploiting either of these situations to make a profit from trading oil, we need to look at the statistics. We know historically that there has been a fairly consistent correlation between oil prices and the U.S. dollar. Thus, when the dollar strengthens, oil prices tend to fall, and vice versa. In both cases, a trader could be in a strong position to make a profit by placing short-term trades.
Investors have various ways in which they can turn these kind of geo-political events into profit-making opportunities. Binary options offer traders an ideal way to get involved with trading oil and a broker’s binary options platform will offer this exciting commodity as part of its portfolio to traders while giving them the potential to make handsome returns on their investment. In addition, the fact that that oil is closely correlated with other assets such as the dollar and gold, makes it an ideal commodity to trade as a binary option.
So, if we take the first case scenario and assume that the conflict in Yemen deteriorates, a trader could look to capitalise on this trend by deciding on their investment amount, selecting a timeframe on the broker’s binary options platform and placing a ‘Call’ option on the price of oil going up. A favourable outcome would mean the trader stands to make a profit. In this particular situation, a trader could consider trading one-hour options as a quick way to make a profit. 60 Second options would also be worth considering, particularly as the market is trending in an upward direction. In a similar way, if the embargo on Iranian oil exports was lifted, we could expect the price of oil to fall. In this case, a trader could, once again, choose a timeframe and then place a ‘Put’ option on the price of oil falling. In the same way, a favourable outcome means a trader could make a profit. Hence, with these kinds of scenarios, traders monitoring the markets can quickly step in to take advantage the trends in order to exploit money-making opportunities created by the event.
In our illustration, we used one-hour and 60 Second options as an example. Any first-class binary options platform will provide traders with a variety of additional timeframes such as Pairs and Long Term, as well other tools and features to help them exploit opportunities like these in the markets.
As a final note, it is important for traders to ensure they take the time to familiarise themselves with the factors that influence the price of oil and understand when these factors come into force. In doing so they will place themselves in the best position to maximise their trading experience…and their profits.