Young Traders Turned To Crude Oil As Supply-Demand Imbalance Grew

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AT-A-GLANCE

• Crude oil was by far the most-traded futures contract in the 2021 CME Group University Trading Challenge, with several teams taking a position on an uptrend that lasted into the new year

• OPEC has renewed its position to continue gradual output increases in order for supply to catch up to global demand for oil

Crude oil, which became one of the world’s most actively traded commodities, caught the attention of some student traders in the 2021 CME Group University Trading Challenge.

Some of the top student teams took advantage of trends in crude oil to build simulated portfolios that topped $1 million each this past October. That included the first place team, Tadeofutures, which traded crude oil exclusively and achieved a simulated account balance of $1,741,360, the highest-ever in the competition’s 18-year history.

Overall, students participating in the challenge traded 112 different futures contracts during the competition, but crude oil was by far the most popular market to trade amongst the 1,549 competitors.

Out of nearly 660,000 contracts, crude oil futures contracts were traded more than 160,000 times, double the next two popular contracts – the E-mini Nasdaq and E-mini S&P 500, which traded over 77,000 and 71,000 contracts, respectively.

“Fundamentally we saw clues going toward higher oil prices, and technically, just before the start of the competition, crude oil broke above $80 a barrel, which was a seven-year high at the time,” said Adrian Veseli, leader for team Salukis from Southern Illinois University (SIU), which finished fifth overall out of 167 participating teams from around the globe.

During the competition, crude oil demand outstripped supply, a phenomenon that has continued to drive oil markets in 2022. The Organization for Petroleum Exporting Countries (OPEC) had just opted to maintain its gradual output increase through 2022. That news fueled a 9% price increase during the four week challenge (Oct. 3 – 29).  At its February meeting, OPEC stuck to its plan to continue increasing output by 400,000 barrels per day beginning in March. WTI crude oil continued to hover in the $80-$90 range throughout January and into February.

A Commodity They Knew

A team from Virginia Tech came in third in the challenge, with a $1.29 million simulated balance. Team leader Adi Sircar says the team of three students started by learning the futures market to know what they were doing. That’s part of the reason why they picked crude oil, a commodity they knew and understood.

The OPEC news gave them more reason to choose crude oil. Sircar says he remembered learning about how the cartel worked, “so we saw that report and that gave us confidence that the price of oil was going to rise.”

They bought early and sat on the position, riding the momentum higher, exiting near expiry, relying on technical analysis reports in addition to the fundamental news. The team also learned that prices can quickly turn against traders when Sircar again bought crude oil on what turned out to be the October top. “It was a rash decision, and I learned a lesson to not do that,” he says.

Santiago Chisco, leader of the first place Tadeofutures team from the University of Bogota Jorge Tadeo Lozano in Colombia, explains that his team focused on volume and price action generated on daily opening and closing levels, while also looking at weekly action. They acted when key price levels were triggered on daily and weekly chart points, but they also kept an eye on intraday volume and price action, sometimes trading based on five-minute charts.

“I think what helped us the most to win were the events with oil. It was easy to identify the upward trend,” he says.

Falling Supplies Collide with Demand

Veseli of team Salukis from SIU says the four-person team chose crude oil as a core position based on both fundamental and technical research, while also trading Eurodollars and U.S. Treasury notes as satellite positions.

He believed that with consumers and producers focusing on net-zero carbon emissions and clean energy, falling crude oil supplies were colliding with demand picking up after pandemic lockdowns eased. They also paid attention to OPEC data releases as part of their fundamental research.

It was a timely approach that picked up on early signs of a supply-demand disparity in the market. Increased demand for crude oil has continued and OPEC recently predicted growth of 4.2 million barrels per day in 2022.

Timothy Perry, faculty advisor for SIU, says one of his main roles was to have the team members understand what was available to trade and how leverage and margin work in futures markets.

Veseli says had they just gone long crude oil the team wouldn’t have come in fifth place, but it was intraday trading of the smaller positions in Eurodollars and Treasuries that helped to boost their standing.  

Many of the students expressed that the challenge helped them learn valuable skills and about markets new to them. Veseli says he’ll continue to monitor oil.

“I learned a lot about how crude oil markets work and what causes price movements. Even after this competition I still look at crude oil every single day, and I don’t think that’s something that’s going to change.”

The annual CME Group University Trading Challenge is a digital trading competition that allows students to experience the decision-making environment of real-time futures trading, all free of charge. Since the competition began 18 years ago thousands of undergraduate and graduate students from over 60 countries have competed for cash prizes. Visit the trading challenge website to learn more.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.