Oil
Oil futures began trading on the NYMEX in 1983. Crude oil is the most heavily traded of all commodities.
The price of oil, like any commodity, is affected by supply and demand. However, supply is somewhat tricky when it comes to a commodity like oil. There are only estimates of how much oil lies beneath the surface of the earth. Those estimates change continuously. Oil consumption comprises 39% of all US energy use.
Many geologists today feel the world has hit, or is close to hitting peak oil production. Up until now in modern times, man has always been able to keep pace with the demand for oil. The more demand, the more supply oil companies would find to meet the demand. This has kept the price of oil, adjusted for inflation, a relatively cheap commodity in relation to the growth in demand.
Peak oil, first discussed in the Hubbard Peak Theory, presents the production of oil as bell curve. According to peak oil advocates, we are somewhere near or just past the top of that curve. The following chart represents most of the present known oil reserves and their production potential.
As supply fails to keep up with demand, the price of oil will be forced every higher. The price can accelerate exponentially if world demand does not cool.
Oil and the Dollar
Many traders, as well as the American public, fail to take into account that most oil trading is done in US dollars. The US imports 56% of its oil today. By 2025 it is estimated that figure will grow to 68%. When foreign governments sell our country oil in US dollars, they must convert the US currency into their native currency.
As the value of the dollar drops, it will take more dollars to equal the same conversion profit for the oil producing countries. The only way oil producing countries can make up that difference is by forcing prices up.
There is a strong move in many countries, Iran, Russia, China for example, to move away from the US dollar and toward the Euro. This move will adjust prices even higher in the United States.
Oil Trading Instruments
The most popular oil trading instruments are futures, symbols CL and QM. Traders can also take advantage of moves in oil by trading oil company stocks. There are also several Exchange Traded Funds now available. USO, a pure play on the price of oil and OIH, the oil service holders, a fund diversified across the oil service industry.