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Investing in Oil Markets

Investing in Oil Markets

There are many options for gaining exposure to oil as an investment. But like any other type of investment, Oil has unique risk qualities that investors should understand.

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

How to use this guide

  • Find out how you can invest and trade in Oil
  • Open a trading account to get access to our platform
  • Research your Oil related-assets and start trading

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 risk of direct exposure to oil as a commodity.

Each of these investment types can be acquired through an online brokerage account.

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.

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, 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.

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 as 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 that refine and sell the end products.

How to Trade Oil

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 CFDs to trade on oil’s 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.

It’s essential to understand that CFDs are leveraged products. When you decide to trade CFDs, 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 with CFDs if:

  • You are interested in speculating on the underlying price of Oil and other Oil-linked assets
  • 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 can take advantage of rising and falling crude oil markets and oil-linked assets with CFDs on our award-winning platform.

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

  1. Open and fund your account
  2. Decide how you want to gain exposure on Oil
  3. Open your first Oil trade

1. Open and fund your account

Open Oil trading account with CAPEX

Simply fill out our online form to open an account – there is no obligation to add funds until you want to place a trade.

Once the 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. Decide how you want to gain exposure on Oil

Oil Trading

When you trade oil with CAPEX you speculate on whether the asset’s price will rise or fall between opening and closing your trade.

You can gain exposure on oil markets through our futures prices, oil company shares, and oil-linked ETFs – available via CFDs (contract for differences).

Your choice will depend on your experience level and trading strategy.

  • When you trade Oil futures with us, what you will be getting is a CFD (contract for differences) 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. With CAPEX you can trade these companies' shares as a single CFD product. The weight of each share, (percentage allocation) is determined based on their market capitalization: Chevron 20%, Exxon 26%, Total SA 13%, British Petroleum 12%, Petro China 8%, ConocoPhill 6%, Schlumberger 5%, ValeroEnergy 4%, Occidental 3%, Holly Front, Marathon Oil and Sinopec with 1%.

3. Open your first position

Oil Trading

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 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 of Investing in Oil

  • 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 of Investing in Oil

  • 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.

FAQs (Frequently Asked Questions)

How much money do I need to invest in oil?

Investing in oil is not just for the rich, and it can be affordable. Several well-known oil stocks frequently trade for under $100 a share. ETFs are another inexpensive way to invest in oil. ETFs trade on an exchange and investors can buy individual shares of an ETF, like stocks. The median market price of 43 energy ETFs is around $24 a share as of this writing.

Are there more sustainable investments than oil?

While investing in oil may be enticing for some, other investors may prefer a more sustainable option. Investments are sometimes graded using ESG factors (environmental, social, and governance), which can give you an idea of how sustainable a company or investment is. Some ESG investments even have criteria that require them to be free of fossil fuel investments.

Is Oil investing better than gold investing?

Investors who choose to invest in gold are those that prefer safer investments with lower risks. Unlike other commodities, gold has maintained its value throughout time and is a safe way to preserve wealth from one generation to the next. To invest in oil, it is important to know what influences the rise and fall of prices, and how to approach oil investments. Oil prices are affected by supply and demand.

What is the best time to trade crude oil?

The best time of day to trade oil is when the markets are most active. These periods can occur quite regularly as oil is such a popular and volatile market. There is usually a lot of activity when the underlying exchanges first open and in the last half an hour or so before they close.

So, if you were looking to trade WTI, for example, you would need to look at the trading hours for the New York Mercantile Exchange (NYMEX) – which would be 1 pm and 6.30 pm (UK time).

Is oil traded 24 hours a day?

You can trade oil for 24 hours a day, five days a week, depending on which market you choose.

What is the Brent Crude Oil?

Brent oil comes from 15 different oil fields in the North Sea. It is also characterized as a “light and sweet” oil, although it is not as “sweet” or “light” as WTI. Up to two-thirds of global oil contract trades are on Brent.

What is WTI Crude Oil?

As the name suggests, WTI is sourced from US oil fields primarily in Texas, Louisiana, and North Dakota. It is referred to as 'light sweet crude oil' due to its low density and low sulfur content. These characteristics make it less expensive to produce and easier to refine than 'heavy' or 'sour' oils. WTI is the main benchmark for oil consumed in the US.

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You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.

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