Effectively and Efficiently Investing in Oil

For some years now, private investors have been looking at the oil market very closely. It is firstly worth to mention that the value of this energy raw material evolves generally upward, despite strong fluctuations depending on the particular period. But why is it interesting to speculate on the black gold and, especially, how is it possible to buy oil to achieve good earnings in the short, medium and long term? That’s what I’ll try to illustrate in this article.

Why buy oil?

Investing in the oil market has a number of advantages, both for long-term investors who buy the barrels through investment banking products such as ETFs, and above all, for speculators performing shorter term transactions on markets through CFDs (Contract for Difference) and other derivatives offered by online brokers.

We can note that the overall evolution of the oil has been following an upward trend for years, largely because of rising Asian demand but also because of the numerous tensions that animate the producing countries that regularly threaten the supply to the western countries.

Oil has become an investment product highly sought after because, according to specialists, the offer will not satisfy the growing demand indefinitely. Its price, therefore, can only increase in the long term. But oil has also the huge advantage of presenting a very high volatility that allows traders to get very quick profits betting on upward or downward micro-movements of its value using instruments like CFDs or binary options.

How to concretely buy oil

There are several solutions that allow you to buy oil, such as trading of futures or forward contracts that is the most popular method. Oil futures and oil future options represent one direct method of owning oil, but these instruments are also highly volatile and involve a high degree of risk as loss on unpredicted movements may be very high. Investing in futures requires the investor to know and understand them deeply before taking action and requires to invest a large amount of capital too. Thus their use is somehow complicated for beginner traders. Ideal for non-professional traders is to use other kind of derivatives such as CFDs, warrants or binary options which have a lower level of risk compared to futures – you can invest less and you can’t lose more than the invested capital.

With these different solutions, you can buy and sell virtually barrels of oil without owning them physically. Any of these instruments has its peculiarities and you should study and understand the varying amount of involved risk before buying.

Another direct method of owning oil is through the purchase of commodity-based oil exchange-traded funds (ETFs). ETFs trade on a stock exchange and can be purchased and sold like the other stocks. E.g. buying one share of the U.S. Oil Fund (AMEX:USO – ) would give you exposure to roughly one barrel of oil.

Investors can also gain an indirect exposure to oil through the purchase of energy-sector ETFs, like the iShares Global Energy Sector Index Fund (PSE:IXC – ), and energy-sector mutual funds, like the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk as oil price movements reflect with some latency.

As you can see, there are several ways to buy oil but the simplest and quickest (but more risky) is surely online speculation with derivatives.

How to effectively speculate online on oil

First of all, you must know that derivative products like binary options or CFDs allow you to speculate on oil price both upward and downward movements. So you will earn if you can anticipate the movements irrespectively of the trend. To succeed you will need to know the factors that directly affect the price of oil. Here are the main ones:

The relationship with the Dollar: like all commodities, oil is traded in US dollars. Consequently, when the value of the dollar increases, the barrel becomes expensive for foreign investors. There is therefore in this case a drop in oil prices and, on the contrary, a price rise when the dollar falls.

U.S. Total Stocks: The United States are the country that consumes more oil in the world, so the state of its stocks, published every week, has a strong correlation with oil price. When the real stocks exceed the forecasts, there is often a drop in oil prices and vice versa.

Shale Oil Production: Shale oil is an oil produced from oil shale rock fragments. Global technically recoverable shale oil reserves have recently been estimated at about 2.8 to 3.3 trillion barrels of shale oil, with the largest reserves in the United States. Production of this oil looks like a very important indicator after that OPEC entrusted the market with the job of rebalancing oil demand and offer. Signals of shale oil production slowdown reflect in an increase of oil price.

Conflicts in producer countries: Finally you should follow closely the news from the producing countries, often at war. Conflicts usually cause a surge in prices because of fears of a shutdown or slowdown of supply.

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