How to invest in oil?
OPEC does what is possible to reduce an oversupply but the price takes its own course. Oil prices fell towards 43$ a barrel, dropping to a ten-month low. Compared to this year’s peak it is a 30% downgrade. Cut price offers a good opportunity for bargain hunting. In this article we will take a closer look at financial instruments which allow you to trade on the oil market.
1. Future contracts and CFD
Oil is traded as Crude Oil WTI (ticker symbol: CL) on the New York Mercantile Exchange.
If you are interested in a short term investment and a higher risk is acceptable for you this asset class is for you. CFDs (Contract For Difference) are financial instruments that represent the price of an underlying asset (in this case Crude Oil WTI). Future contracts and CFDs allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
Future contracts and CFD belong to the group of risky financial instruments. Both, future contracts and CFDs allow traders to earn on short term price moves. Both are using leverage which means that you determine the value of a tick that depends only on your deposit and the level of the risk you can bear. It is basically how leverage works. The difference between them is that the required margin to trade future contracts is much higher than CFD. When you are trading future contracts you have to be ready to close and open your position if the result on rollover day is not satisfying for you. CFDs are traded continuously.
Most of inexperienced investors think that these class of assets allows them to invest with small deposit. Actually, it requires much more money to maintain a position on future contracts or CFD market when things are moving in the unexpected direction.
2. Exchange Trade Funds
ETFs is a good alternative for long-term investors who are not ready to bear higher risks. In most cases ETFs are no-leverage financial instruments which is very important with regards to the security of your investments. What ETFs are I explained in my previous article How to invest around the world using one brokerage company?
When I invest on the oil market I focus on two ETFs: United States Oil Fund (ticker symbol: USO) and VanEck Vectors Oil Services ETF (ticker symbol: OIH).
United States Oil Fund
USO is an ETF that attempts to track the price of WTI Crude Oil. So we can commonly say that its on-leverage equivalent to Crude Oil future contracts.
The following graph depicts the price action for last 3 years.
Just notice, that the price is relatively cheap and it is near historical lows. The barging is 27% compared only to this year’s peak.
VanEck Vectors Oil Services ETF
OIH is an ETF that isn’t a direct link with Crude Oil, but it represents 25 of the largest US-listed, publicly traded oil service companies.
A 32% price decline compared to this year’s peak and price near all time lows creating a good opportunity to join this market.
3. Oil companies stocks
American stocks are mostly overestimated including American oil companies. I do not recommend investing your money in American shares. I elaborated further this issue in my report What are some smart financial and business decisions to make in 2017?
Still relatively cheap shares are Russian shares. Recent sharp falls in commodity prices have accelerated the price decline. In this respect, it is worth mentioning one of Russia’s largest oil companies and one of the largest global producers of oil- Lukoil. Lukoil is listed on the Moscow Stock Exchange (ticker symbol: LKOH) or in USA as American Depositary Receipt (ticker symbol: LUKOY)
When we see a 33% decrease in the price of the asset it offers an opportunity to earn at least 50% only when the price will be back to a point of reference. In our case it is this year’s peak. When can you lose your money? Only if the price of an asset equals 0$. Can you imagine Crude Oil at 0$?