How to Trade Crude Oil?
Crude Oil is still one of the most popular assets among active traders in derivatives markets. But to many, crude oil trading looks like the wild texas. Since it is the only marketplace lacking diversification compared to other risk-on markets like equities. For instance, its traditional futures products can swing $1,000s per day, and the energy source’s options boast twice the volatility of the S&P 500. *
How to Invest in Oil?
Investing in oil can be done by two methods:
1. Direct Method
Here an investor can invest in the following options
- Oil futures
- Commodity-based exchange-traded funds (ETFs)
- Spot energies
2. Indirect method
Here an investor can invest in the following options
- Energy sector ETFs
- Energy sector mutual funds
- Stock in individual oil companies.
What do you understand by "Oil" in trading?
Crude oil is a yellowish-black liquid, it is extracted from reservoirs beneath the Earth's crust. Also called petroleum, it is a fossil fuel formed from the remains of ancient animals and plants living millions of years ago. Oil is utilized after it is purified into other products, such as gasoline, heating oil, and asphalt.
Since oil is a commodity, indicating that it is a base derivative or raw material used to make other products, it has significance as an asset. Like many other entities, such as gold or various agricultural products, oil can be traded as an asset.
Oil's abundance demonstrated efficacy and transnational popularity are among the reasons that some investors acknowledge that the commodity will be a treasured asset for the foreseeable future and hence, it attracts investors and traders to the commodity.
Pro Tip: When you invest in oil, investors infrequently take ownership of the commodity itself. This varies from equity investing, where shares of stock denote ownership of the issuing company. For this reason, the methodology of investing in oil is often referred to as ‘acquiring exposure’ to oil.
How to acquire direct exposure to Oil?
In crude oil trading, investors can acquire direct exposure to oil via the acquisition of futures or options contracts or by buying commodities-based ETFs or mutual funds. Futures and options can be tricky and involve a high grade of risk, whereas ETFs and mutual funds are relatively uncomplicated and risky.
Oil futures: Mandates a buyer to buy investment security, or sell investment security, on a specified cessation date, unless the position is locked before expiration. When it comes to oil futures, investors rarely plan on taking ownership of the asset.
Oil options: Provides the buying investor with the privilege to buy (call option) or sell (put option) the underlying asset, in this case, oil.
Commodities funds: Allows an investor to purchase shares of an ETF or mutual fund that records the performance, with fewer fees, of an underlying commodity index, such as a crude oil index.
The type of investors that generally fund directly in oil is those who are keen to take on the added risk associated with futures, options, and speculation. Oil and other commodities can also be used for diversification and hedging methods.
Read Also : crude oil trading strategies
What are the Pros and Cons of Investing in Oil?
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 substantial volatility, there are imaginable opportunities for investors to obtain above-market returns.
Diversification: Exposure to investment types with performance that is not highly associated to other investments can help to diversify a portfolio. Investing in oil stocks or the energy sector can provide benefits 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 barricade.
Cons of Investing in Oil
Numerous risks: Investing in oil brings multiple risks, such as world events, oil price conflicts, nation regulation, technical shifts (such as toward electric vehicles), cyclicality, and monetary conditions, many of which can cause impulsive 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 considerably diversified funds. Purchasing oil futures or options can raise even more volatility and risk.
Take away
Oil and gas trading is a good option to diversify your portfolio. Traders can invest in WTI oil or Brent oil and they can even opt for natural gas trading.