Why is Oil Valuable?
Before the Industrial Revolution, agricultural staples like corn and wheat ruled the commodities market. Today, however, crude oil and its derivatives are the most actively traded commodities in the world. That’s not surprising, considering oil touches just about every aspect of the global economy, in terms of consumer goods themselves as well as their production and transportation.
Here’s a look at the basics of investing in oil and the various oil trading opportunities.
If you think of oil mainly as fuel to power cars, trains, jets, and ships, you’re only seeing a tiny piece of the puzzle. Oil is a major component in the manufacture of plastics, synthetic textiles (acrylic, nylon, spandex, polyester), fertilizer, computers, cosmetics, and even steel. In fact, less than half of a 42-gallon barrel of oil actually goes to fuels production; the rest is used to make consumer goods. It’s estimated that the average American uses about three gallons of petroleum products per day.
How Much Oil is Used Per Day?
What Are the Different Types of Oil?
Although the market for oil is global, oil trading has clustered around several primary regions. The crude oil in each of these regions has slightly different characteristics, typically referred to in terms of viscosity (light versus heavy) and sulfur content (sweet versus sour).
Each of the major trading regions has established benchmarks to track price movements in oil commodities:
- West Texas Intermediate (WTI), which is a light sweet crude oil, with gravity of around 40 on the American Petroleum Institute (API) gravity scale and low sulfur content.
- Brent Crude is a light sweet crude oil from the North Sea. Its gravity is similar to WTI, but its sulfur content is slightly higher. From an oil investing point of view, it’s closest in quality to WTI.
- Dubai Crude, also known as Fateh, is denser (heavier) than both WTI and Brent and has a higher sulfur content, making it a sour crude. It’s useful in oil trading as a benchmark for oil shipments in the Middle East.
- OPEC Reference Basket is the weighted average of the mix of crudes produced in the OPEC region. It is heavier than both WTI and Brent.
- Bonny Light is a light sweet crude from Nigeria that’s useful as a benchmark for African oil. Its properties are similar to WTI and Brent, and in fact, demand for Bonny Light is primarily driven by European and American oil refineries.
- Urals is a heavy sour crude representative of Russia’s oil exports.
West Texas Intermediate (WTI)
A light sweet crude oil, with gravity of around 40 on the American Petroleum Institute (API) gravity scale and low sulfur content.
A light sweet crude oil from the North Sea. Its gravity is similar to WTI, but its sulfur content is slightly higher. From an oil investing point of view, it’s closest in quality to WTI.
Also known as Fateh, is denser (heavier) than both WTI and Brent and has a higher sulfur content, making it a sour crude. It’s useful in oil trading as a benchmark for oil shipments in the Middle East.
OPEC Reference Basket
The weighted average of the mix of crudes produced in the OPEC region. It is heavier than both WTI and Brent.
A light sweet crude from Nigeria that’s useful as a benchmark for African oil. Its properties are similar to WTI and Brent, and in fact, demand for Bonny Light is primarily driven by European and American oil refineries.
A heavy sour crude representative of Russia’s oil exports.
Oil Price: What Price is Oil Trading At?
Canadian Crude Index
Canadian Crude Index
West Texas Intermediate
West Texas Intermediate
What Affects The Price of Oil?
In financial terms, oil is a “fungible” commodity, which means that specific grades of oil are identical for oil trading purposes, regardless of where they were produced. For example, a contract for 1,000 barrels of WTI crude will be exactly the same product whether the oil was extracted in Texas or North Dakota.
As with all commodities, supply and demand play a major role in oil pricing, although the global pool of oil and the ease with which oil moves around the world levels some of natural price pressures of supply and demand. It also tends to somewhat limit the influence of one particular producer or other in the global market.
In addition, new resources have come online, specifically Canadian oil sands and U.S. shale oil, which add to the global supply, exerting downward force on oil prices in times of heavy demand. However, extraction costs for these resources mean these oils are only competitive in a lower supply and therefore higher price environment.
That said, the International Energy Agency (IEA) predicts growing global demand buoyed by an increasing world population, increased energy consumption in developing countries, and growth in the road transportation, petrochemical, and aviation industries. Even though OECD (Organisation for Economic Cooperation and Development) countries are reducing their road transportation oil consumption on a per-vehicle basis, the growing automobile fleet in developing countries far outpaces those minor reductions.
A (Brief) History of Oil
[timeline-express horizontal=”11″ timeline-express categories=”14″ items=”3″ slide_distance=”3″ no-icons=”1″]
Which Countries Produce the Most Oil?
Top 10 Oil Producing Countries
|Rank||Country||Flag||Oil Production (Barrels per day)|
Top 10 Countries by Oil Reserves
|Rank||Country||Flag||Proven Reserves (millions of barrels)|
What About Shale Oil?
In 2016, an estimate by the World Energy Congress set total world resources of oil shale at a little over 6 trillion barrels. It is hard to know whether that is a big number without some context so to give you some idea the world’s other proven oil reserves are estimated to be 1.7 trillion barrels.
You may not have heard of the term shale oil but chances are you’ve heard about fracking (or hydraulic fracturing) which is the process used to obtain shale oil. It gets a lot of bad press but like it or not, shale oil is a key part of our energy supply chain now and looks set to grow in importance as other reserves are depleted.
Here’s a video that explains fracking:
Where in the World is Shale Oil Found?
Top 10 Shale Oil Rich Nations
|Rank||Country||Flag||Shale Oil Reserves (Millions of Barrels)|
Ready to Start Trading Oil?
Our recommended brokers for trading oil are:
- Plus500 – Review | Visit Website
- eToro – Review | Visit Website
- Markets.com – Review | Visit Website
- Nadex – Review | Visit Website
4 Reasons To Trade Oil
Crude oil investing has several advantages over traditional equities for certain trader classes. Depending on your investment objectives, oil trading can be used for:
- Safe Haven
- Inflation Hedging
Adding oil commodities to an equities-only or fixed-income portfolio lowers the overall volatility because there is non-correlation between these asset classes. Commodities like oil are useful in countering price movements in a traditional portfolio.
Commodities are helpful during periods of global economic uncertainty because they tend to retain their value even during market turbulence. Investing in oil can be a strategy against exposure to loss if the market takes a downturn.
Commodities have intrinsic value independent from currency, which means they hold their value even as the value of currency falls in an inflationary environment. This is especially true of oil, given the constant and reliable global demand.
There are often wild swings in commodities prices; investing in oil futures and derivatives is a way to profit quickly from movement in oil prices, which are notoriously volatile. It’s not unheard of for prices to move 5% or 10% in a single trading session. Wall Street speculators aren’t the only ones betting on oil volatility; many major institutional traders buy oil-linked investments for their endowment and pension funds.
Perhaps the most significant advantage of trading oil is that demand is virtually guaranteed. There may be fluctuations in supply—and therefore price—but for the foreseeable future there is demand is unlikely to flatline or disappear.
Experienced traders with a high tolerance for risk can make substantial profits on low capital outlays, especially with CFDs, but also with oil ETFs and futures contracts.
The major risk with commodities in general—and oil investing in particular—is the extreme volatility in the market. The risk of loss is high, especially with derivatives, due to factors entirely beyond the trader’s control. It is not an investment for people with risk aversion, and oil trading should be just one strategy in a well-diversified portfolio.
How to Trade Oil
Trading oil requires a bit more consideration than other types of assets because there are many product choices you can use to get into the market, from pure-play oil derivatives to oil and gas company equities. Each has its own advantages and set of complicating issues.
Most oil commodities traders will choose one of the following options:
|Method of Investing||Complexity Rating (1=easy, 5=hard)||Storage Costs||Security Costs||Expiration Date||Management Cost||Leverage||Regulated|
|Buy Oil Barrels||5||YES||YES||NO||NO||NO||NO|
This is perhaps the least complex method of crude oil investing; you simply purchase equities in a company you believe will remain profitable. It’s important to keep in mind that although there is usually a correlation between the price of crude and oil company profitability, this isn’t always the case—and disasters like the BP oil spill can do serious damage to an otherwise solid investment.
Interested in oil stocks? Here are the 5 biggest listed oil companies:
|Current Price||Overview||Listings||Founded||Number of Employees||Interesting Fact|
|Sinopec||Chinese oil and gas company based in Beijing||Shanghai (SSE), Hong Kong (SEHK), New York (NYSE), London (LSE)||2000||350,000+||Largest oil refiner in Asia|
|ExxonMobil||American multinational oil and gas corporation||New York (NYSE)||1999||80,000+||Largest refiner in the World with a capacity of nearly 6m barrels per day|
|Royal Dutch Shell||British-Dutch multinational headquartered in The Netherlands||London (LSE), Amsterdam (Euronext), New York (NYSE)||1907||90,000+||Shell have over 40,000 service stations worldwide|
|BP||Headquartered in London but the USA houses the lion share of its operations||London (LSE), Frankfurt (FWB), New York (NYSE)||1908||74,000+||Burmah Oil Company, the company that eventually became BP, was the first to discover oil in the Middle East|
|Total SA||French multinational||Paris (CAC), New York (NYSE), Amsterdam (Euronext)||1924||100,000+||Total has over 900 subsidiaries covering all areas of energy|
Exchange-traded funds or ETFs are one of the ways traders can gain a piece of the oil market. You can choose funds that track the performance of oil prices using futures contracts or funds tied to a basket of oil company equities. Here are the 5 leading oil ETFs based on their assets under management:
|United States Oil Fund||iPath S&P GSCI Crude Oil Index ETN||ProShares Ultra Bloomberg Crude Oil||PowerShares DB Oil Fund||ProShares UltraShort Bloomberg Crude Oil|
A futures contract is simply an agreement to buy or sell a quantity of oil at a specified date for a specified price. These are standardized instruments for WTI and Brent that trade on the NYMEX; the standard contract is for 1,000 barrels of oil, so a $1 movement in price is equal to $1,000. Most oil futures contracts require about a 10% margin, which is rather high given the cost of 1,000 barrels of oil, although margins can change depending on volatility—don’t be surprised to get a margin call on oil futures contracts.
Futures contracts are settled by physical delivery of the crude oil, which is something most traders don’t want to deal with, so it’s important to keep track of delivery and expiration dates and either roll the position over another month or close it entirely before the contract expires.
Trading oil futures is typically for professional traders due to the high cost and complexity involved. However, contracts for difference or CFDs provide a convenient way to “access” the crude oil futures market, see below for a detailed explanation.
Oil is a global 24-hour market with constantly moving prices; it’s an ideal medium for day traders to profit from fast movement. It’s also a highly liquid market, so it’s easy to get in or out, regardless of the size of the trade.
A “Contract For Difference”, or CFD, is basically a contract between an trader and a broker to exchange the difference in value between when a trade is entered and exited. Standard leverage is usually between a 2% and 20% margin requirement, although lower-end margins are more typical. Most CFD brokers provide the facility to speculate on the price of oil futures contracts but contract sizes are typically much smaller than standard futures contracts; a crude oil CFD order can be for as little as 25 barrels (depending upon the firm) compared to 1,000 barrels for a standard futures contract.
CFD trades are frequently commission-free (the broker makes a profit from the spread), and since there is no underlying ownership of the asset, there is no shorting or borrowing cost.
Here’s how CFDs work: This is NOT a trading recommendation
You’re bullish on WTI, so you decide to invest in oil CFDs at the quoted price of $60.25 to $60.50 (the lower price is for a short contract, the higher for long).
To buy 10 long CFDs on 3% margin, you would need $1,815 in your account ($60.50 [long price] x 10 [number of contracts] x 100 [number of barrels in a standard contract] x 0.03 [margin percent]). You would then “control” $60,500 worth of oil for your $1,815.
That afternoon, you notice the price is up to $62.50 to $62.75, so you exit the trade, which now has a value of $62,750. You pocket roughly $2,250 on the deal. Of course, if the price ticks down, the degree of leverage works against you rather quickly.
CFDs are complex financial products, they aren’t available in the US and are only recommended for experienced traders. You will not own the oil itself but your capital is at risk.
Plus500 is one of the top brokers in oil CFD trading.
This is an example and not a trading recommendation.
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade oil and hundreds of other markets
- Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission
With oil options, an trader essentially pays a premium for the right (not the obligation) to buy or sell a defined amount of oil at a specified price for a specified period of time. Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange (NYMEX), one of the largest derivative product markets in the world
Despite their name, the underlying of these options is not actually crude oil itself, but crude oil futures contracts. Options in the oil market—and the commodities market in general—are more expensive due to the high perceived volatility of commodities prices.
Oil Binary Options
- Binary options exchange
- Trade oil as well as dozens of other commodities and markets
- Regulated and legal for US residents
- Low cost with no broker commissions
- Guaranteed limited risk
What are binary options?
Binary options limited-risk contracts based on a simple yes/no question about the market’s price action. For example, “Will the price of oil be above $X at 3pm today?”. If you believe the answer to that question is yes then you might buy the binary. If you think the answer is no then you would sell. If at 3pm you’re right you get the $100, if not then you get zero.