In the early 1900s, in order to trade oil, you would need to actually buy physical oil barrels, store them somewhere, and then ship them to your buyer. Luckily, nowadays, you don’t need to. In fact, you don’t even have to see the physical oil itself. That’s because most oil and gas trading is handled via futures.
What are Oil Futures?
Oil futures are contracts in which you agree to exchange a set amount of oil at a set price on a set date. They are traded on futures exchanges and CFD brokers and are the most commonly used method of buying and selling oil.
While actual oil importers and exporters use futures to insure against the adverse effects of oil price volatility, you, as a trader, can use them to speculate on oil prices without buying or selling the commodity itself. That’s because the prices of oil futures will move as the value of the real and physical oil goes up or down.
So instead of buying oil, storing it, waiting for its price to increase and then selling it on and arranging for it to be delivered, you can buy a futures contract and then sell it when you want. In doing so, you’re taking advantage of the same increase in price without the same logistical effort.
How to Trade Oil Futures?
1. Trade via CFDs
The issue with buying and selling contracts in a commodities exchange is that you need a large quantity of orders. You can’t just buy these oil contracts with your $100 spare change. That’s where CFDs come in.
What are CFDs?
CFDs are Contracts For Difference. They allow you to trade on the changing prices of oil without buying and selling the contracts themselves. And instead of trading on a commodities exchange, you create an account with a broker.
Benefits of Trading Oil with CFDs:
- You can trade on the spot prices of oil benchmarks, as well as futures and options
- You can go both long and short on a huge variety of oil markets, on a single platform
- You don’t have to be a professional to get started making money from oil trading
2. Invest in Oil Companies
Instead of trading actual oil, which may be volatile and lead to wild price swings, you can get exposure to oil via the shares of oil companies and oil Exchange Traded Funds (ETFs). The price of oil heavily influences the prices of oil companies, and in some cases, offer good value compared to trading oil itself. You can use ETFs to invest in oil benchmarks or a basket of oil stocks.
The advantage of this is that even if the price of oil becomes negative or changes rapidly if the oil company you are investing in has sound and good fundamentals, your investment still has value and can reasonably recover or even go higher.
Best Oil Companies for Investing and Trading:
- Royal Dutch Shell B
- Aramco Saudi Arabian Oil Corp.
- British Petroleum
- Lundin Petroleum AB
- Exxon Mobil
- Total SA
Best Oil ETFs for Investing and Trading:
- Energy Select Sector SPDR (XLE)
- SPDR S&P Oil and Gas Exploration and Production (XOP)
- iShares Global Energy ETF
Is Now a Good Time to Invest in Oil?
Oil — the most actively traded commodity — is volatile. Throughout history, oil prices have risen and fallen, quite spectacularly at times, on the back of changing business landscapes.
For traders and investors, these oil price movements can present attractive opportunities.
That is particularly true when oil prices crash, as they tend to rebound quite quickly. During the global financial crisis of 2008/2009, for example, the price of West Texas Intermediate (WTI) crude oil dropped from around $145 per barrel to approximately $30 per barrel — a decline of roughly 80% — in the space of less than six months. After the global financial crisis though, the price of WTI crude oil rebounded back up to $110 per barrel by April 2011 — a rise of more than 250% in just over two years — on the back of supply cuts and an increase in demand.
Just recently, the price of oil went negative! The lack of travel has caused the price of oil to an all-time low. Demand has fallen, and storage capacity has started to bother businesses. When the lockdown is over, travel, and flights resume, the price of oil could rally back up. Traders and investors must remain cautious and careful as this commodity may rise and fall unexpectedly anytime.