Introduction to Influential Events

With the opening up of so many oil contracts to the retail investor, you now have a lot more options than simply buying a Brent contract. Unlike trading on the broader, generic oil price, trading specific derivative contracts allows traders to respond to events with targeted precision, minimising extraneous market “noise.” Each event type—whether geopolitical, economic, or weather-related—impacts the market in distinct ways, and specific contracts within the oil swaps ecosystem can provide a more direct response to these shifts, giving traders an edge by aligning their positions closely with the event’s anticipated impact.

Geopolitical events, for example, are one of the most significant influencers in oil trading. Political tensions, military actions affecting oil infrastructure, and shifts in international relations can add a “geopolitical premium” to oil prices. Events such as the 2019 tensions between the Trump administration and Iran, the 2022 Russian invasion of Ukraine, and ongoing tensions between Israel and Palestine have historically led to spikes in outright oil prices, as well as supply route disruptions impacting differentials and timespreads.

During such times, outright price contracts and arbitrage contracts tend to be the most responsive, allowing traders to capture the immediate price impacts of supply fears and risk premiums tied to geopolitical instability. These contracts typically exhibit rapid price action, reflecting heightened market volatility and trader sentiment surrounding the event’s perceived impact on supply stability. Generally events can be summarised as on of the following:

OPEC/OPEC+ production quotas: This producer organisation and their decisions on how they will supply the market creates significant trading opportunities. Decisions to adjust oil output, as seen in the 2014 decision to maintain production for market share, the 2020 price war, and subsequent cuts, have historically moved oil markets, affecting the balance between supply and demand. Differentials like Brent v Dubai are predictably impacted by these decisions, as are Dubai timespreads, and product cracks to crude like Fuel oil v Brent (Fuel crack).

Extreme weather events: The most regular and recurring of which are hurricanes in the Gulf Coast of the USA. When hurricanes like Hurricane Harvey strike, they can disrupt both supply by damaging oil infrastructure and refineries, and reduce domestic demand as communities focus on recovery. Key end user linked contracts impacted by such events include US based gasoline, heating oil and natural gas liquid (NGL) contracts, given that the U.S. Gulf Coast is a crucial hub for these resources. Production of crude can also be impacted, therefore US crude contracts are also tradeable in these scenarios. The most prudent way to trade hurricanes are the differentials, given these are rarely a global events. This means either a US product v Brent (product “cracks”) or US crude versus international crude such as WTI v Brent.

Other extreme weather events like natural disasters will invariably have an impact on oil contracts somewhere. For example, an earthquake in Japan and its impact on Fukushima for example caused an huge spike in Low sulfur fuel oil prices relative to high sulfur fuel oil (search contracts for Fuel oil), which whilst a niche contract, is tradeable and highly predictable if you can connect the dots. A nuclear reactor going down meant that Japan needed to find alternatives to power their grid, for which they used a low sulfur fuel oil, which was immediately able to be sourced and imported into the region, and then burnt to provide crucial electricity needs.

Macroeconomic events: These events including announcements to shifts in monetary policy, inflation data releases or trends, , also offer significant opportunities for oil derivative trading. For example, a rise in U.S. Federal Reserve interest rates might strengthen the U.S. dollar and suggest a boost for the US economy, which could be perceived as bullish the outright market. The only thing certain is that there is no clear way macroeconomic events impact oil, but being aware of how macroeconomic data and trends leads to changes in buying and selling is important, particularly given the amount of macro portfolios in the world that have oil futures in their portfolio. A shift in policy may signal a new regime or economic cycle, and therefore lead to a risk-parity portfolio going under or overweight oil, which in turn will lead to very real and influential buying and selling flows in the financial oil market.

Shipping issues: The movement of oil is primarily by shipping cargos and barges on water, as well as by pipeline. Therefore any disruption to shipping that impedes crude or products flowing from one producing area to a consuming area can potentially create deficits and gluts inter region.

Natural events such as droughts affecting key shipping routes like the Panama Canal or the River Rhine can heavily, and predictably impact what are called “arbitrage” differential contracts. For example, the Panama Canal being impacted will inhibit NGL flows from the U.S. to Asia and likely lead to a lower price in US Propane v Asia Propane (LST v FEI) for example, as delays increase transportation costs and create temporary market imbalances. A price correction in this differential lower (US down, Asia up) can incentivise the movement of propane from US to Asia by making the journey more profitable, thereby offsetting the increased transportation costs from the disruption.

By strategically selecting contracts based on the specific nature of an event, traders can capitalise on movements that more directly reflect the event’s impact on the market. Each scenario, from geopolitical tensions to extreme weather or economic shifts, offers unique trading opportunities, with corresponding contracts offering the potential for higher stability, profitability, and a more accurate reflection of the event’s effects on the oil market.