HOW TO INVEST IN OIL MARKET
High volatility makes predicting oil prices extremely difficult. Still, the US Energy Information Administration tries to do their best. According to the latest EIA’s short-term energy outlook, Brent oil prices will average $67 per barrel and WTI crude oil prices will average $62-$63 per barrel for the rest of 2019 and 2020.
If forecasts are to be believed, global demand will boost oil prices to $92 by 2030, to $105 by 2040, and to $107 per barrel by 2050. All signs suggest that oil won’t lose ground and will draw investors’ attention over and over again.
How to invest in oil with little money and without buying oil at all
Serving as the no. 1 most-traded commodity worldwide, oil remains one of the major economic drivers. If you’re thinking of oil investing, you’re definitely not alone. The good thing with oil is that you can invest in the oil industry in several different ways without actually taking delivery of it. So, what’s the best way to invest in oil? Let’s choose the one that suits your goals.
TRADE OIL FUTURES
Considered one of the most direct ways of trading commodities without buying actual barrels, future contacts are purchased through commodity brokers. Buying futures, you buy a contract to purchase oil at a specified future date at a predetermined price.
As most people don’t have storage facilities and proper distribution channels, trading oil futures is what we usually think of when we talk about oil investments.
The key specs on trading the two most popular oil benchmarks – WTIand Brent crude – through futures contracts are the following:
Oil futures are the most-traded futures on the market, which makes them extremely liquid. However, oil futures are extremely volatile as it’s very difficult to predict further oil price movements.
TRADE OIL CFDS
Contracts for difference is one of the most popular ways to invest in oil with little money. Speculating on the oil price difference between opening and closing the trade, you don’t actually buy oil itself.
One of the major advantages of CFD trading is leverage. For example, if your CFD broker offers you a 10% margin on oil trading, it means you have to deposit only 10% of the total value of the trade you want to open, and the rest is covered by your CFD provider. Therefore, if you’d like to open a position for $1,000 worth of crude oil, you actually need only $100 as the initial amount to open this trade.
Furthermore, CFD trading often doesn’t require any commission, as CFD brokers profit from a spread.
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Another advantage of CFD trading is its flexibility. While a standard oil future contract is for 1,000 barrels, CFD allows to trade much smaller sizes. For example, you can place a CFD order for 25 barrels.
That said, since CFDs are a leveraged product, the risk of losing all your invested capital is magnified.
INVEST IN OIL SHARES
Another way to invest in crude oil is through trading oil stocks. In this case, you should not only follow global oil prices, but also to delve deeper into the production potential of a certain oil company.
Understanding the full energy cycle and the competitive landscape, as well as estimating the companies’ financial performance, will help you to distinguish valuable trading assets.
The list of major players in the crude oil production market includes the following companies:
Sinopec
China
The largest oil refiner in Asia
ExxonMobil
USA
The world’s largest oil refiner with a processing capacity of 6m barrels a day
Royal Dutch Shell
UK
Shell operates more than 40,000 oil service stations worldwide
BP
UK
BP was the first to discover oil in the Middle East
Total SA
France
The company has a network of 900 subsidiaries, covering all areas of energy production
TRADE OIL ETFS
Exchange-traded funds (ETFs) are another option for you to consider. Providing you with access to a bunch of different assets at once, ETFs diversify your portfolio and removes the necessity to choose just one or several stocks to trade.
Investing in commodity-based ETFs is also popular among oil traders. In general, ETFs can be bought and sold as ordinary stocks. The major advantage of trading oil ETFs is that they provide diversification across the oil industry in general at a relatively low price. Moreover, they help to avoid the risk of trading highly volatile single stocks. The three best performing oil-based ETFs in 2019 include: Vanguard Energy ETF (VDE), VanEck Vectors Oil Services ETF (OIH), and United States Oil Fund (USO).
TRADE OIL MLPS
A Master Limited Partnership (MLP) is a publicly traded entity, which enjoys the tax benefits of a partnership and the liquidity of publicly traded stocks. By investing in a crude oil MLP, you become a limited partner that receives its share of profits.
Usually, these companies specialise in oil pipeline business, transporting the commodity from one location to another. It means that very often their performance differs from the performance of traditional oil production stocks. If you’re looking forward to invest in oil MLPs, keep track of the following: Enterprise Product Partners (EPD), Western Gas Partners (WES) and Marathon Petroleum’s master limited partnership (MPLX) to start with.
In the end
Take your time to find out how to invest in oil market and achieve your ultimate trading goals. Learn more on how to invest in oil shares, oil ETFs, oil MLPs, or oil CFDs to make sure you make the right choice.
Oil - Brent
Sell
28.53
Buy
28.67
Historic oil price drop
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