Is this a good time to invest in oil shares?

The oil market shows signs of recovery

Following a few challenging months, the oil market is showing signs of recovery. Will it last or will the aftermath of the coronavirus and Saudi Arabia-Russia oil war lead to another drop?

This question is not only important for Brent or WTI crude traders. The oil industry involves numerous companies and affects indices, oil ETF futures and many other financial instruments. In this article, we’ll take a quick look at what’s been happening in this volatile market, discuss what could happen next and then explain how it relates to oil stock trading with iFOREX in the form of CFDs.

But first, a bit of oil price history. Our story begins in January 2020…

Oil crashes below zero

Between January 8th and April 24th, WTI oil price crashed by over 78%. At some point on April 20th, as we’re sure you know, the price on the futures contract for West Texas crude fell below zero. That was a shocking day for energy traders, but why did this happen? Well, the answer is “storage”. As the coronavirus pandemic brought the economy to a standstill, the piles of unused oil just kept getting bigger until – amazingly enough – the American energy companies simply ran out of storage room. As a result, traders were ditching crude contracts that were about to come due and the price of oil plunged.

The trend changes

Following the historic price crash, the energy market was heavily shaken, but then the trend changed – and the recovery was also jaw-dropping. Between April 22nd and May 17th, WTI oil price surged by over 115%. No, that’s not a typo. True, it’s still far from where it was at the beginning of the year, but as any trader knows, what’s important is when you buy and when you sell and if you caught the latest uptrend, there must be a big smile on your face.

Why are oil prices rising?

The main reason for the recovery in oil price is the coronavirus or – more accurately – the signs that the crisis is being slowly resolved. Just like how the sudden halt of economies around the world pressured WTI price, the gradual reopening of economies worldwide is boosting the popular commodities. There are also signs indicating that crude demand might be recovering.

In addition, OPEC (Organization of Petroleum Exporting Countries) and its allies have been implementing substantial production cuts in an attempt to balance prices.

Mohammad Barkindo, OPEC’s secretary-general, told Bloomberg that the organization remains “cautiously optimistic that the worst is behind us”. He also stated that “What we saw in April was extraordinary” but claimed that OPEC rose to the challenge.

US oil companies join the cuts

It’s not just Russia and Saudi Arabia making cuts. Surprisingly, and in contradiction to certain statements made by President Donald Trump, American oil producers have also cut their output. This means the US is unofficially working alongside Russia, Saudi Arabia, and other major producers, to help balance supply and demand. According to Bloomberg, data from the US Energy Information Administration suggests that crude production decreased by 1.2-1.4 million barrels a day, depending on weather you look at the weekly or monthly figures. In any event, the decrease is substantial.

Oil is not just a commodity market

It’s tempting to view oil as a commodity-based market. WTI and Brent are commodities. Some people buy and see actual barrels, some trade Brent and WTI online in the form of CFDs with leading, regulated brokers such as iFOREX, but the focus is still on the price of a commodity.

However, the energy market is not limited to commodities. They also involve oil ETFs, many companies that deal with drilling, storage and oil productions, not to mention the world’s large oil producers, and some are companies with stocks that can be traded online.

For example, when you look at oil stock trading with iFOREX in the form of CFDs, you have many relevant instruments on top of Brent and WTI. You can also choose to trade oil ETF CFDs – and that’s even before we discuss related energy companies such as gas and electricity companies that are strongly related to the oil market.

Is this a good time to invest in oil companies?

There is no one who knows for sure if the oil market - and the companies involved in it – will continue to recover, although OPEC certainly seems to believe this will happen. Will the oil market climb to the levels seen in January or higher, pulling oil stocks with it, or will the aftermath of the coronavirus leave global economy in severe recession, leading to another oil decrease?

At iFOREX, you can trade share CFDs of large oil-related companies such as Chevron, ExxonMobil, Repsol and – of course – the world’s largest oil producer Saudi Aramco.

When trading CFDs, you can also take advantage of price changes in either direction – up or down. Join now to benefit from free educational resources, 1-on-1 training with a trading coach and a $5,000 Demo Account for risk-free practice.