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Oil Trading and Investing

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Cristian Cochintu
Cristian Cochintu
25 March 2024

There are many options for gaining exposure to oil markets. But like any other type of trade or investment, Oil has unique risk qualities that traders and investors should understand. 

Relax, you do not need to buy a well to start oil trading and investing. You don’t even need a lot of money. Oil futures, oil-linked stocks and funds make it more accessible for beginners to trade and invest in petroleum-related products — without having to relocate to Texas.   

Steps to Trading or Investing in Oil  

  1. Select your Oil market: choose between Oil futures or a selection of oil stocks and ETFs
  2. Choose your strategy: Decide whether you would like to trade on Oil prices short term or buy Oil assets for long term - and how you're going to manage your risk.
  3. Open an account: Fill in our online form to create a Trade or Invest account.

Oil as an asset 

When investing in oil, investors rarely take ownership of the commodity itself. This differs from stock investing, where shares of stock represent ownership of the issuing company. For this reason, the process of investing in oil is often referred to as "gaining exposure" to oil. 

The steps you will need to take to gain exposure to oil will depend on whether you are willing or not to take the risk of direct exposure to oil as a commodity. Each of these exposure types can be acquired through an online brokerage account. 

Brent Crude and West Texas Intermediate (WTI): Oil Benchmarks

Brent Crude is the benchmark used for the light oil market in Europe, Africa, and the Middle East, originating from oil fields in the North Sea between the Shetland Islands and Norway. West Texas Intermediate is the benchmark for the U.S. light oil market and is sourced from U.S. oil fields.

Both Brent Crude and WTI are light and sweet, making them ideal for refining into gasoline.

Since Brent Crude is more widely used, it serves as the standard for most oil prices—roughly two-thirds of all oil pricing. Because Brent Crude is produced close to the ocean, shipping expenses are considerably lower. As a result of its production in landlocked regions, West Texas Intermediate has higher transportation expenses.

Brent Crude and West Texas Intermediate (WTI)

Most of the oil production and distribution are under the jurisdiction of the Organisation of the Petroleum Exporting Countries (OPEC), which frequently sets prices for both oil providers and entire nations. Budgets for many countries take oil prices into consideration, making OPEC a significant geopolitical power.

In the United States, West Texas Intermediate is the preferred measure and pricing model. It is also slightly "sweeter" and "lighter" than Brent. West Texas Intermediate (WTI) is slightly lower in price than Brent. 

Importance of petroleum supply and demand

Just like any investment, supply and demand play a role in how much oil is worth. For now, our society depends on it for everything from commuting to work to heating homes. But that demand may change in the future. The increase in renewable energy solutions like wind and solar power, the amount of oil available around the world, and the conflicts surrounding oil production all play a part in oil supply and demand. 

Oil and gas investors look for specific economic indicators to help them understand future movements in the petroleum industry.  

Oil is a limited resource, meaning that one day we will run out of it. In the meantime, as that supply dwindles and we still rely so heavily on it, the demand may increase. 

Aside from supply and demand factors, another force driving oil prices has been investors and speculators bidding on oil futures contracts. Many major institutional investors now involved in the oil markets, such as pension and endowment funds, hold commodity-linked investments as part of a long-term asset-allocation strategy. Others, including speculators, trade oil futures for short periods of time to reap quick profits. Some observers attribute wide short-term swings in oil prices to these speculators, while others believe their influence is minimal. 

However, oil prices can go both ways, turning trades into a profit or a loss. If you are new to speculative trading, you can practice on a risk-free demo account before investing real money. 

 

Trading and Investing in Oil Directly 

Investing in Oil directly

The type of investors that typically invest directly in oil is those who are willing to take on the added risk associated with futures, options, and speculation. Oil and other commodities can also be used for diversification and hedging strategies. 

Oil funds 

Another direct method of gaining exposure to oil is through commodity-based oil exchange-traded funds (ETFs). Oil ETFs trade on a stock exchange like stocks and track the performance, with fewer fees, of an underlying commodity index, such as a crude oil index. 

For example, as of Feb 26, 2022, one contract of the U.S. Oil Fund (USO) at $65 would give you exposure to less than one barrel of oil priced at $100 per barrel. The fund's investment objective is to provide daily investment results corresponding to the daily percentage changes of the spot price of West Texas Intermediate (WTI) crude oil. 

Oil Futures 

Oil futures are contracts in which two parties agree to exchange a set amount of oil at a set price on a set date. If the price of oil rises, the contract may become more valuable, and the owner of the contract could sell it for a profit. If it falls, the contract could lose value and, in turn, the owner could lose money when selling. 

The two most popular types are Brent Crude and West Texas Intermediate (WTI), which are traded on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX) respectively. They are used as benchmarks for global oil prices, as well as economic health. 

Oil options 

An oil option is like a futures contract but there is no obligation to trade if you do not want to. They give you the right to buy or sell an amount of oil at a set price on a set expiry date, but you would not be obliged to exercise your option. 

There are two types of options: calls and puts. If you thought the market price of oil was going to rise, you might buy a call option. If you thought it was going to fall, you would buy a put. You can also sell call and put options if you wanted to take the opposing positions. 

Trading and Investing in Oil Indirectly 

Investing in Oil indirectly

The type of investors who prefer indirect exposure to oil are typically those who do not want the added risk of direct exposure to oil as a commodity.  

Energy ETFs 

For example, an energy sector mutual fund or ETF is one way to gain broad exposure to oil and energy stocks with less sensitivity to oil price fluctuations than direct oil. They invest solely in the stocks of oil and oil services companies and come with lower volatility. 

Such examples are iShares Global Energy ETF (IXC) or T. Rowe Price New Era Fund (PRNEX). 

Oil Stocks 

Investors can also invest in oil indirectly by buying shares in individual oil companies. There are three types of oil companies: upstream companies, which drill for oil; midstream companies, which operate pipelines for transporting crude oil; and downstream companies which refine and sell the end products. 

How to Trade and Invest in Oil  

Oil investing and trading are two different ways to take a position on the future price movement of oil markets. As described above, there are several types of oil assets available for you to trade or invest in, depending on whether your interest is in the physical asset or not.

When you invest in oil, you’d take ownership of the asset upfront and profit if the precious metal or shares of oil companies rise in price. You might want to buy shares in companies like BP or Shell directly or choose a diversified oil ETF like the Energy Select SPDR Fund to diversify into multiple S&P 500 oil producers. 

Oil trading is the buying and selling of different types of oil and oil-linked assets with the aim of making a profit. You can use leverage to trade on oil futures prices, or the prices of oil-linked assets, without having to own any actual oil or shares of companies and funds.  

The first benefit is that you can trade in either direction by going long (open buy position) if you think the price will go up or going short (open sell position) if you think the price will go down.   

Oil derivatives can be also used for hedging to reduce the risk that comes with any losses against profits for capital gains tax liabilities that may apply. When hedging, you might decide to open two positions that directly offset each other, which means when the one makes a loss or gain it offsets the change in value of the other. 

It’s essential to understand that derivatives are leveraged products. When you decide to trade, you do not need to deposit the full value of that position, and you only need to deposit a margin. But bear in mind that leverage can increase both your profits and your losses. 

You might want to trade Oil IF:

You might want to invest in Oil IF:

You are interested in speculating on the underlying price of Oil  
You want to trade rising and falling markets - going long and short  
You want to leverage your exposure  
You want to take shorter-term positions  
You want to hedge your portfolio  
You want to trade without owning the underlying asset 
You’re interested in buying and selling oil stocks and ETFs
You’re focused on longer-term growth
You want to build a diversified portfolio
You want to take ownership of the underlying asset
You want to gain voting rights and dividends (if paid)

Get started with CAPEX.com 

You can take advantage of rising and falling crude oil markets and oil-linked assets with our award-winning platform. You'll get competitive prices on Brent and US Crude – with spreads starting from as low as 0.04 points.

With us, you won’t have to take ownership of the underlying asset or worry about physical delivery. However, you can still buy shares in the most popular Oil companies and funds or energy ETFs. Your choice will depend on your experience level, strategy, and risk appetite. 

If you’re ready to open a position, here are three steps to follow: 

1. Open and fund your Trade or Invest account  
2. Choose the Oil assets you want to trade or buy
3. Open and monitor your position

 

1. Open and fund your Trade or Invest account  

Simply fill out our online form to open an account – there is no obligation to add funds until you want to place a trade. To open an account, click the "Register" button and complete your details.

  • A Trade Account offers access to +2,100 CFDs on stocks, commodities, indices, bonds, forex, and cryptocurrencies. 
  • An Invest Account offers access to +5,000 stocks and ETFs with ownership.

Once the CAPEX.com platform is accessed, the registration process must be completed to operate with real money. Click "Complete the Registration and Start Trading".

To trade with a live account, it is necessary to deposit funds. This is done from the platform itself by clicking on the "Add funds" button. 

Alternatively, you can practice trading first in our risk-free demo account. 

2. Choose the Oil assets you want to trade or buy

When you trade oil with CAPEX.com you speculate on whether the Oil prices will rise or fall between opening and closing your trade.

You can trade oil markets on our futures prices – available via derivatives. You can also buy or trade derivatives on Oil company shares and Oil linked ETFs. 

Oil futuresOil company shares and Oil linked ETFsOil and Petroleum Blend of Stocks
When you trade Oil futures with us, what you will be getting is a derivatives contract on the underlying futures price. You will not have to enter a futures contract, so at expiry, we will rollover your futures contract into the next month, unless you manually close your position.With CAPEX you can ‘buy’ (go long) or ‘sell’ (go short) +2,000 international shares to speculate on their price rising or falling. You can also take a position on our range of ETFs to get exposure to a basket of shares from an entire country, index or sector that could be rising or falling in price.Oil and Petroleum ThematiX is a basket of selected shares from large NYSE-listed Oil Companies. The weight of each share, (percentage allocation) to the ThematiX is determined based on their Market Capitalization. With CAPEX can trade these Companies' shares as a single CFD product.

3. Open and monitor your position

Now that you know how you will trade and what you want to focus on, it is time to open your first position. You will need to choose whether to buy or sell the market – depending on whether you think oil will rise or fall in price – and decide on your position size, which will determine the margin you pay. 

This is also a suitable time to think about how you will mitigate risk. We offer a range of solutions for risk management, including stop-losses and limit-close orders – these are used to close trades at predetermined levels of loss and profit, respectively. 

What moves the price of oil 

The balance between supply and demand is what drives the price of oil. When demand for oil exceeds supply, the price of oil will rise. Oil prices will decline if demand falls and supply floods the market. 

There are a plethora of factors that might influence oil supply and demand, and we have listed four of the most frequent ones here. 

The influence of OPEC 

The Organization of Petroleum Exporting Countries (OPEC), produces a massive portion of the world's oil supply. The organization determines production levels to meet global demand and can affect oil prices by increasing and lowering supply. 

OPEC and its allies agreed to limit production rates to stabilize prices during the 2020 Covid-19 epidemic. However, a disagreement with Russia, a non-OPEC but big exporter, resulted in a precipitous decline in oil prices. 

Global economic performance 

Oil demand rises during periods of economic expansion to meet the needs of businesses such as energy, transportation, manufacturing, and pharmaceuticals. If demand for oil exceeds supply, the price of oil will rise. 

If the economy is in a slump, however, demand for oil will decline, resulting in lower oil prices if production continues. 

Economic data releases, such as GDP (Gross Domestic Product) and employment figures, are frequently used by oil traders to assess the health of an economy. 

Oil storage 

There will be a surplus of oil if demand for oil declines, but supply continues, which will be diverted into storage facilities. However, the amount of oil that may be kept is limited. Concerns about excess oil will affect market pricing as these tanks fill up. 

For example, traders' concerns about tightening oil-storage capacity due to the coronavirus prompted crude oil futures to plummet in April 2020. For the first time, the price of oil went negative at one point. 

The push for alternative energy sources 

Energy corporations are under increasing pressure to develop new ways to generate power as climate change becomes a more prominent topic in global discussions. Alternative energy sources, such as solar, wind, and hydroelectric, may reduce the demand for oil. 

Pros and Cons of Trading Investing in Oil 

All investments come with a degree of risk, but some investments are safer than others. Investing in an oil fund is considered safer than investing in a single oil stock, because of the diversification offered by a fund, which holds many investments. Speculating on the futures prices of Oil directly is often considered riskier. 

Pros

  • Potential for returns: While the price of oil and the share value of oil-related investments can have periods of significant volatility, there are potential opportunities for investors to obtain above-market returns. 
  • Diversification: Exposure to investment types with performance that is not highly correlated to other investments can help to diversify a portfolio. Investing in oil stocks or the energy sector can provide returns that differ from other sectors. 
  • Inflation hedge: Since prices for commodities, including oil, can rise along with the prices for goods and services in an economy, oil can be used as an inflation hedge. 

Cons

  • Numerous risks: Investing in oil brings multiple risks, such as world events like the current Russia-Ukraine conflict, oil price wars, government regulation, technological shifts (such as toward electric vehicles), cyclicality, and economic conditions, many of which can cause sudden and dramatic fluctuation in oil prices. 
  • Volatility: Mutual funds or ETFs that track a single asset price or sector tend to be more volatile than broadly diversified funds. Purchasing oil futures can introduce even more volatility and risk. 

Final words about Oil Investment

Crude oil is an essential commodity that provides energy and petroleum products to the global market. 

Investors can speculate on the price of oil directly by trading in oil derivatives that track the price of Brent and WTI crude. 

Finally, you can also play the oil markets in a more indirect manner by investing in oil drillers and oil services companies, or ETFs that specialize in these sectors.

Free Resources  

Before you start Oil trading or investing, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.  

Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities. 
 

FAQs (Frequently Asked Questions) 

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Cristian Cochintu
Cristian Cochintu
financial_writer

Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.