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How to Buy Oil - All About Investing in Oil [GUIDE]
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How to Buy Oil - All About Investing in Oil [GUIDE]

created Alice Nowak2 May 2020

How to buy oil - this sentence flooded discussions on forums and social media in just a few days. unprecedented crude oil sales on the market that we observe recently result in naturally increased interest in investing in this energy carrier. Therefore, in this article I will explain the basic aspects associated with it and answer the question of how to buy oil.

Crude oil types

The answer to the question of how to buy oil is complicated by the fact that there are several types of oil in the markets. However, before we get to the types of oil listed on the markets, let's say a few words about this commodity in general, in isolation from the investment context.

Oil is an energy resource that is used to produce liquid fuels and many synthetic materials, including plastics. It is a strategic resource that drives the global economy.

Brent Crude Oil Chart


Different oil properties

"Black gold" differs in its properties depending on the deposit from which it is extracted. We can distinguish different types of crude oil due to the density, chemical composition, sulfur content, resin content and paraffin content.

The most desirable oil for industry and energy is the light variety with low sulfur content. Heavier and more polluted oil require greater capital expenditure in the process of their purification and adaptation to industrial needs.

Standardized types of oil listed on the markets

Hundreds of this raw material are extracted from hundreds of deposits worldwide. For simplicity, the most liquid and popular oil species are used as benchmarks, i.e. reference points for the valuation of this raw material. The basic oil price benchmarks are presented below:

Brent Crude Oil (Brent Crude Oil)

Crude oil from deposits in the North Sea, located between Norway and the British Isles. It is a crude oil with good properties - relatively light (835 kg / m0,37) and with a low sulfur content (XNUMX%).

Crude Oil WTI (Oil WTI - West Texas Intermediate)

The variety comes from the deposits located in Cushing, Oklahoma, USA. It is a crude oil with very good properties - very light (827 kg / m0,24) and with a low sulfur content (XNUMX%).

Crude Ural (Urals Oil)

Oil from deposits in Russia. The Ural oil consists of a heavy, acidic variety mined in the Ural Mountains and a light variety mined in West Siberia.

OPEC Reference Basket

The OPEC basket is calculated based on the weighted average oil price of OPEC members. The basket includes oil extracted by: Algeria, Indonesia, Iraq, Iran, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. The weighted average oil density from the OPEC basket is higher than Brent oil.

How to buy oil - Futures, CFDs and ETFs

The choice of how to invest in oil is not limited to choosing between contracts for the Brent or WTI variety. So how do you buy oil? We have many more possibilities. Let's get acquainted with them all.

Futures

Oil futures are not available directly on our Stock Exchange. Fortunately, Polish investors can buy oil futures contracts on foreign exchanges via Polish brokerage houses or use the services of foreign brokers.

Investing in oil through futures contracts requires the involvement of relatively large capital. One futures contract is for 1000 barrels of oil. Futures contracts are indivisible, which means that we can buy a minimum of 1 contract.

Futures contracts based on the price of WTI oil and based on the price of Brent oil are available.

Futures contracts have 5 characters symbols. The first two characters are the symbol of raw material. The third character is the symbol for the month when the contract expires. Each month is assigned a symbol in the form of a letter. The last two characters are the year the contract expires.

June contracts for WTI oil can be found under the symbol CLM20 (Crude Oil WTI Jun '20), while the June contracts for Brent crude can be found under the symbol CBM20 (Crude Oil Brent Jun '20).

CFDs

Another way to invest in oil is CFDs (Contract for Difference). Their quotations are usually based on the price of WTI or Brent oil. We can invest in oil CFDs with virtually any Forex broker.

Unlike Futures contracts, investing in CFDs does not require the involvement of large capital. CFDs are leverage contracts, which means we can open positions much larger than the capital employed in them. Currently in Poland, non-professional investors have at their disposal a leverage of 1:10 on commodity contracts. This means that with a deposit of PLN 1000, we can trade contracts worth PLN 10.

It is worth adding that CFDs can be opened to both increases and decreases, which opens up much more investment opportunities for us.

In the case of CFDs, the amount of commissions and spreads varies depending on the broker's offer. CFDs are not standardized from above.

Crude Oil CFDs - Brokers

Below is a list of selected brokers offering crude oil CFDs.

Broker xtb 2 tickmill forex fxpro
End Poland Great Britain Cyprus
Types of oil WTI
Brent
WTI
Brent
WTI
Brent
Min. Deposit PLN 0
(recommended min. PLN 2000 or USD 500, EUR)
PLN 100 PLN 500
Platform xStation MetaTrader 4 / 5 MetaTrader 4 / 5
cTrader

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

ETF for oil (and not only)

While CFDs may be most appealing to those who are speculative on short-term oil price movements, those who are more long-term investors may be more interested in buying ETFs. In this case, we also have the option of using a leverage of 1:10 (or less depending on the broker).

Oil ETFs are one of the most liquid ETFs because they are listed on the world's largest stock exchanges. The downside of ETFs is the ability to earn only on price increases. We won't find oil ETFs at the Warsaw Stock Exchange. Currently, the WSE offer includes only ETF on WIG20, DAX i S & P500. However, brokerage houses that help invest in ETFs listed on foreign markets come to the rescue.

Below are the most popular ETFs with exposure to oil prices.

United States Oil Fund L.P. (USO)

It is the most liquid of all ETFs based on oil prices. USO maps the price of monthly futures contracts for WTI listed on NYMEX. The annual fee is 0,79%.

United States Brent Oil Fund LP (NOS)

BNO is an ETF based on the price of monthly Brent crude futures contracts listed on the ICE Stock Exchange. It has lower liquidity than USO, but it should be sufficient for the average investor. The annual fee is 0,88%.

Energy Select Sector SPDR Fund (XLE)

It is an ETF consisting of the largest US mining companies. Shares of Chevron and Exxon Mobil constitute slightly more than 45% of the fund's value. The annual fee in this fund is only 0.13%.

how to buy oil xle composition etf

Source: ETF.com

Mining companies - stocks or ETFs

Another way to invest in oil is to invest in mining company shares. This is an indirect method of investing in oil. Its advantage is a significant reduction of volatility, and therefore it is a good option for people focused on long-term, quiet investing.

You can invest in individual shares of selected mining companies from foreign exchanges through brokerage houses. Another method is to purchase the entire basket of mining companies shares using ETFs.

Valuations of mining companies do not react as dynamically to market conditions as oil prices. This is very well illustrated by the unprecedented drops in oil prices that take place in April 2020.

The ETF United States Oil Fund LP (USO) associated with the price of WTI crude futures contracts lost -80% in a year's perspective.

etf oil USO quote

Source: ETF.com

For comparison, ETF for the largest US mining companies Energy Select Sector SPDR Fund (XLE) in a year's perspective he lost "only" -45%.

etf XLE valuation how to buy oil

Source: ETF.com

As you can see, "depreciation" when investing in oil indirectly, through mining companies, is quite large. This can save a lot of nerves for a long-term investor during periods of turbulence on the prices of the raw material itself.

Oil ETF - Brokers

Below is a list of selected brokers offering ETFs based on oil prices.

Broker xtb 2 saxo bank logo small Admirals
End Poland Denmark Great Britain
The amount of ETF on offer approx. 400 - ETF
approx. 170 - CFDs on ETFs
3000 - ETF
675 - ETF CFDs
approx. 200 - CFDs on ETFs
Min. Deposit PLN 0
(recommended min. PLN 2000 or USD 500, EUR)
0 PLN / 0 EUR / 0 USD PLN 5
Platform xStation SaxoTrader Pro
Saxo Trader Go
MT5

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

Oil based wallet

An oil-based portfolio could be an interesting alternative to ETFs. This solution was introduced by the broker eToroby creating a wallet named OilWorld Wide.

Less than 85% of the portfolio consists of shares of 20 largest companies in the world from the oil sector, selected by capitalization. Another 10,6% are oil-related ETFs, including Energy Select Sector SPDR i SPDR S&P Oil and Gas Exploration and Productionand the remaining 4,4% futures contracts.

The downside is the entry threshold, which is a minimum of $ 2000. However, it must be admitted that the portfolio composition ensures quite reasonable diversification.

oil fund etoro

76% of retail investor accounts lose money when trading CFDs with this provider. Consider whether you can afford the high risk of losing your money.

Technical aspects of oil contracts

Rolling contracts

Rolling contracts is, in the simplest language, closing a position on an expiring futures contract and opening another position on a new futures contract. This whole procedure is called "Rollover"and in colloquial speech "Rollover".

Oil futures have a monthly expiry date. If, after the expiry of e.g. May contracts, we want to continue to maintain our position, we must make the so-called rolling, i.e. close our May contracts and buy June contracts.

In the case of CFDs and ETFs based on contracts, the broker performs rollover for us. If there is a difference in the price of the contracts, a price gap arises. Most forex brokers neutralize the gap in open positions by adding or subtracting (depending on the direction of the open position) swap points.

important: some Forex brokers do not use the classic rollover version. Instead, they charge each night swap points for keeping the position for the next day.

If we want to find out when rollover contracts take place, let's look at the roll table for the given year. Each broker should provide such a table with expiry dates of contracts offered to him.

Contango on oil

contango is the price difference that occurs when rolling contracts. In the case of commodity contracts (which includes oil contracts), this difference is quite common and can mess with profits.

This is due to the fact that contracts for raw materials also include the cost of storing the raw material in their valuation. If the oil price stays at one level or falls throughout the month, then contracts for the next month will probably open at a higher price, because the cost of storing the raw material for the next month will be added to the basic price of the raw material.

An unusual situation occurs when investors believe so much in the increase in commodity prices that they are willing to buy contracts for the following months at higher prices than the currently recorded price. This situation took place in 2016, when oil prices fell to a record low of $ 30 per barrel, and this is also the case now.

In this case, the costs of rolling the contract every month are enormous and contribute to huge losses, but if the price does not soar as fast and dynamic as expected by investors. Even if the price eventually increases, the costs of monthly rolling of contracts can outrun us from the market and prevent us from monetizing profits from correctly predicted price increases.

how to buy contango oil

Contango for oil.

This article is for information only. It is not a recommendation and is not intended to encourage anyone to undertake any investment activities. Remember that every investment is risky. Do not invest money you cannot afford to lose.
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About the Author
Alice Nowak
An active trader on an individual Forex account since 2014, keenly interested in the subject of economy, business and capital markets. For over 10 years closely associated with the world of IT and new technologies, programmer, internet marketing enthusiast. Enthusiast of spending time outdoors surrounded by nature and greenery or practicing yoga.
2 Comments
  • Raphael FX
    27 April 2020 at 14: 12

    etf on rope now sounds like a good idea. maybe not the rope itself, but the mining companies do. TRADER21 himself mentioned it some time ago and I was looking for a broker for it. #XOP is on XTB. growth prospects are. remain waiting ... :))

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