How To Invest and Trade Oil?

How To Invest and Trade Oil?

Among the most sought-after commodities for online traders and the most popular on trading platforms and banks’ investment products, oil is undoubtedly a must-have asset. However, in order to speculate on the price of a barrel of oil, you need to know how its price is calculated and the main factors that influence it. Here are a few explanations that will help you see things more clearly.

Introduction and quotation of Oil

Depending on the trading platform you are going to use or the investment products offered by your bank, you will have the opportunity to encounter two main types of crude oil. Indeed, crude oil quotation concerns two different main types of oil, WTI (West Texas Intermediate) which is the oil produced and stored in the United States, and Brent which is the North Sea crude. To this, you can add a few other, less well-known types of crude oil such as Dubai Light and Arabian Light.

These different grades of oil are classified according to their quality and therefore the ease of obtaining refined products such as gasoline.

Oil is listed on two main spot and futures markets, namely the NYMEX (New York Mercantile Exchange) and the IPE (International Petroleum Exchange) which is based in London. We will therefore not take into account here the spot markets for refined or finished products, which are very numerous and generally located in the direct vicinity of refining areas. In Europe, one of the best known of these markets is the ARA (Amsterdam, Rotterdam-Antwerp).

The history of oil prices shows a significant increase in prices since 2002 due to strong demand from emerging Asian countries such as China. The record for the WTI quotation is $150 per barrel and took place in 2008.

Oil Presentation

Exchange-traded oil, which is oil on which it is possible to speculate online, is traded in the form of a barrel of crude oil. This does not include refined products or oil companies.

It is traded daily on the spot or spot market in the form of futures contracts. These contracts are commitments to buy or sell a predetermined quantity of barrels of crude oil at a given time, usually 3 to 6 months. The price of this sale or purchase is obviously known in advance. These contracts are generally referred to as “paper barrels”. It is these contracts that allow traders to hedge against the risk of excessive price fluctuations.

But if oil is so interesting for investors, it is mainly because of its high volatility and therefore the possibility of apprehending strong price variations in a very short time.

Why is oil attractive in the long term?

Oil has long been a long-term investment recommended by financial professionals because it was a safe asset whose price was somehow protected by the strength of demand. But in recent months, oil prices have fallen sharply due to overproduction by several producing countries and OPEC’s refusal to lower its quotas. As demand has not evolved accordingly, the price per barrel has undeniably suffered the speculative consequences of this phenomenon, with traders selling their positions en masse.

But today, with the price of crude oil at an all-time low, the long-term outlook is much more interesting. It is indeed wise to take a buying position on oil today and take advantage of its low price, since economists specializing in this market agree that a new upward trend is foreseeable in the months and even years to come. Oil is therefore an ideal investment for individual investors today.

Why invest in the oil market?

Let’s first review the advantages of the oil market as an investment market.

First of all, for long-term investments, oil is an asset of choice. Recently, this energy commodity has seen a sharp drop due to excess production by OPEC countries. But this situation is not expected to last over time, and analysts specializing in this market therefore expect prices to rise again to significant levels in the near future. It therefore makes sense to take a position on oil now in order to take advantage of the low prices and to keep a long position until an interesting recovery takes place.

But investing in the oil market is also interesting in the shorter term. Indeed, this is one of the most volatile assets, which means that the price differences recorded are often very large over short periods and the trends observed are very marked.

Indeed, this energy commodity has many advantages as an asset, the main ones being the following:

  • An expanding sector: The increase in the world’s population and the development of many industrial countries is inexorably leading to an increase in international oil consumption, which suggests that prices will rise in the long term.
  • Short-term profits: Less patient traders will also be able to make interesting profits (but also risk losses) by investing in the oil sector in the short term. This market is one of the most volatile markets with very wide price movements for a barrel of oil and attractive price spreads, especially if you use leverage with CFDs.
  • An accessible asset: It is relatively simple to understand the workings of the oil market, which is influenced by well-known and identifiable factors. Performing an analysis and anticipating future trends in this asset is therefore an accessible thing.
  • Several ways to invest: As we will see below, oil offers different ways to invest with online and stock market investment.

How to invest in the oil sector?

As mentioned above, there are different ways to invest in the oil sector. The first method is to trade directly on the price of a barrel of WTI or Brent oil, directly from the markets.

This method is accessible to all by simply registering with an online trading platform. The two main tools used to speculate on the price of oil are CFDs or contracts for difference.

You can also decide to invest in shares of companies in the oil sector, again through online trading and with the same tools, or by buying these shares in order to integrate them into a stock portfolio as part of a bank investment product with, here, a lower and longer profitability.

Investing in oil over the long term :

Oil is an interesting asset to trade regardless of your investment horizon. In fact, if you plan to take a long position on the price of a barrel, it can be profitable since specialists and analysts in this market are forecasting an increase in the price of crude oil over the next 15 years.

Indeed, although renewable energies are currently booming, crude oil remains an indispensable raw material for the world industry, which is also experiencing significant growth. As a result, demand for crude oil is expected to continue to increase in the future. At the same time, production, although currently in surplus, is likely to become scarcer as producers face increasing difficulties in finding new fields. The widening gap between supply and demand should therefore lead to a price surge in the medium to long term. This future upward trend is also confirmed by the recent fall in prices, which will lead to a drop in production by OPEC countries.

However, to trade oil with CFDs over the long term, we advise you to have a large amount of investment capital to support medium-term fluctuations without having to cut your positions. Indeed, since oil is particularly volatile, the long-term rise in oil prices can go through periods of more or less strong downward correction. Don’t forget to place your stop orders according to this specificity.

Investing in oil in the short term :

Of course, you can also choose to trade oil in the shorter term as this asset is particularly suitable for this purpose due to its high volatility. Indeed, the daily movements of the oil price are generally very marked and of strong magnitude, which allows you to take advantage of large price differentials in a short period of time.

To trade oil in the short term, you will of course need to use leverage, but you will also need to rely on data from both technical and fundamental analysis.

Technical analysis is primarily used to confirm the strength of a trend. However, you will favour fundamental analysis by taking positions, ideally during important events in the market. In particular, the publication of US stocks, OPEC decisions or geopolitical conflicts affecting producing countries are perfect times to invest in the short term on the price of oil.

You will find all these news on the economic calendar made available to you by your CFD broker, as well as customizable charts allowing you to display the technical indicators of your choice for a complete view of the market.

Of course, nothing prevents you from combining these two ways of investing in oil by taking a long position while practicing day trading with shorter positions in order to multiply your profit opportunities and minimize your risk of loss.

Buy and trade oil online with CFDs:

Perhaps the most suitable trading instrument for oil speculation is CFDs. These Contracts for Difference (CFDs) allow you to take a buy or sell position on the price of a barrel of oil.

The use of CFDs is very simple and is done on a trading platform. You simply put your money on a buy position on the price of a barrel of oil if you expect the price to rise, and on a sell position if you expect the price to fall. When you close your position, and if the trend has moved in the direction you predicted, you will earn the difference between the buy and sell price. The leverage available on these Forex trading platforms also allows you to take advantage of even the smallest price changes.

This leverage multiplies your investment by 100, 200 or even 400, which also multiplies your profits (but also increases the risk of loss).

Of course, there are numerous functions that allow you to manage the risk level of your positions or to program an automatic closing of your positions as soon as a given threshold is reached.

Advantages and disadvantages of trading oil with CFDs:

  • Investing in crude oil prices through CFDs has many advantages, but also some disadvantages which we suggest you discover here in more detail. As far as the advantages of this method of investment are concerned, we find :
  • Direct access to the oil market from home and investments made independently.
  • The ease of use of CFDs: CFDs have been specially designed for individual investors and offer a simplified operation since it is a question of taking a position to buy to speculate upwards and sell to speculate downwards.
  • The ability to speculate regardless of market trends: CFDs allow you to buy and sell oil online. This way you can take advantage of both upward and downward trends in the market.
  • Leverage is usually offered when trading oil with CFDs. It allows you to increase your potential gains in order to take advantage of small price differentials. However, it should be used with caution as it can also increase your losses.
  • Know your costs in advance: Thanks to the spreads that represent the way CFD brokers pay themselves, you know in advance how much your trade will cost you. Moreover, these spreads cost much less than traditional brokerage fees.
  • As far as the disadvantages of CFDs are concerned, the risk of loss that also exists for other investment instruments is of course a major factor. Trading is still an activity with risks for your capital and you should be aware of this before you start investing.

Example of oil trading with CFDs:

To better understand how oil CFDs work, let’s imagine that you are looking at an increase in the price of a barrel of Brent. So you take a $100 position in a CFD at a price of $50.00 with a leverage of 1:100. This is equivalent to taking a $10,000 position.

The price of oil rises from $50.00 to $55.00 and you decide to close your position. In this case, your profit will be 10% of your leveraged investment, or $1,000 since you will be selling your position at $11,000.

Now let’s imagine that, contrary to your expectations, the price of oil drops to $45.00 and you decide to limit your losses by closing your position. In this case, you will sell your $9,000.00 position and suffer a loss of $1,000.00.

Selling Crude Oil online with CFDs :

The trading instrument that is probably best suited for selling crude oil online is the one offered by trading platforms, namely CFDs or contracts for difference. These contracts allow you to buy and sell barrels of crude oil in order to speculate on the price, without the constraints of buying physical oil, especially with regard to the highly regulated transportation and storage of this commodity.

CFDs allow you to take a virtual buy or sell position on crude oil. The two types of crude oil that you can trade online are WTI US Oil and Brent European Oil.

How can I sell oil online?

In order to use CFDs and start selling and buying oil online, the first thing you need to do is to create a trading account with a quality Forex broker. At the end of this article, we will advise you to choose a broker recognized for its qualities and approved by the financial authorities.

Once your account has been created, all you will have to do is to take a position on buying or selling oil by betting the amount of your choice. If you trade on the buy side, all you have to do is resell your crude oil when the price of the crude oil reaches a sufficient level. If you have taken a sell position, you will wait for the price to fall before closing your position and then you will also earn the difference.

The advantage of selling Crude Oil with CFDs is that you can take advantage of the leverage that offers you substantial gains even with a small investment or a small price differential between the opening and closing of your position.

Of course, there are other tools available to you on online trading platforms to help you sell your crude oil efficiently and increase your chances of making a profit, such as stop loss and take profit orders.

How to choose your trading platform to trade oil?

Current trading platforms offering CFD investments all offer online trading of WTI and Brent Crude Oil. The choice can therefore be complicated for the investor who often struggles to find his way around the many broker offers.

This is why we have chosen to make an accurate comparison of the best trading platforms offering oil CFDs. We have therefore carried out tests of each of these platforms with a complete and detailed sheet for each of them in which you will find information on :

  • The conditions for opening an account, including the minimum deposit, the means of payment available and the volumes of trades required.
  • The cost of these platforms expressed as a spread. Indeed, on a trading platform, the only fees you will have to pay are expressed as a slight difference between the purchase and sale price and the actual market price.
  • The functionalities of trading platforms. While all trading platforms in the market offer the same CFD features such as stop and limit orders and live trading signals, each platform tries to differentiate itself from the others by creating innovative and convenient features.
  • Indicators and decision aids: In addition to trading signals, each platform offers its users specific market analysis tools through charts integrating specific technical indicators or live news allowing targeted fundamental analysis.
  • Trader support and customer service: This is another important point to check before choosing your broker. It is essential that you can easily reach someone if you have any doubts or questions about your trading experience.

Why choose the trading platform of a regulated broker?

You may notice that our comparison of online oil trading platforms does not include all the brokers in the market, but there is a good reason for this. Indeed, we have chosen to compare and therefore present here only the trading platforms of brokers with valid licenses in France and the European Union and who are therefore considered serious and reliable.

Investing money online should not be done lightly and brokers who have obtained one or more licenses are recognized as being secure and in accordance with the legislation by the financial supervisory authorities in charge. You can therefore deposit your capital there without the risk of fraud or scams.

Choosing a regulated broker is also an excellent way to ensure you a high quality service with many advantages and personalized support.

How to invest and trade oil:

With the ability to trade on the price of a barrel of oil, online brokers offer you the opportunity to invest in this commodity, whether the price of oil is rising or falling and whatever the trend.

eToro is a multi-asset platform offering both equity and crypto-asset investments, as well as CFD asset trading.

Please note that CFDs are complex instruments and have a high risk of rapid loss of funds due to their leverage. 62% of individual trader accounts lose funds when trading CFDs with this provider. You should ask yourself whether you understand how CFDs work and whether you can afford to take the significant risk of losing your money.

The content in question is provided for informational purposes only and should not be considered investment advice. Past performance is no guarantee of future results. Trading history is less than 5 years old and may not be sufficient to serve as a basis for an investment decision.

Crypto assets are volatile instruments that can fluctuate considerably in a very short period of time and are therefore not suitable for all investors. Other than through CFDs, trading in crypto-assets is not regulated by any EU regulatory framework and is therefore not supervised.