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Understanding the Crude Oil Markets

Crude oil futures and oil stocks have one thing in common. They both trend well. Stocks have one advantage, they tend to have unlimited upside potential while the upside in crude oil is often limited because of supply and demand concerns. This and the leverage in the futures markets makes crude oil a difficult market to grasp for some traditional investors.

One of the first steps to take when considering an investment in crude oil futures is to learn how the market trades. Sure, it trends, but the trends are short-lived because of the weekly shifts in the supply and demand data. It is also often influenced by short-term geopolitical events such as the conflict in Iraq currently taking place. This often attracts speculators who disregard the traditional fundamentals and take positions based on what “can” happen. When it all is said and done, the supply and demand situation ultimately dictates which way prices are going to move.

Last week’s trading action offered a prime example of how the crude oil market moves. Although the market reached a new high for the year, crude oil is in a position to close lower for the week because the military conflict in Iraq did not affect supply as speculated and the weekly Energy Information Administration supply and demand report showed an unexpected increase in supply.

Aggressive speculators tend to react to the news, but professional crude oil traders seem to only react when the actual supply of crude oil…

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