How to Begin Investing in Crude Oil

How to Begin Investing in Crude Oil 

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According to the US Energy Information Administration, the US remained the top oil producer in 2023, producing nearly 22 million barrels per day (22% of total global production), followed by Saudi Arabia and Russia, which produced approximately 11 million barrels per day, or 11% of total global production, respectively. 

Considered a ‘hard commodity’, crude oil is a mix of hydrocarbons of different lengths, containing hydrogen and carbon in different sizes and configurations. These hydrocarbons are derived from the remains of plantations and animals and exist in either liquid or gas forms within underground pools (or reservoirs).

Depending on the mix of hydrocarbons, crude oil is referred to as either ‘light sweet crude’ or ‘heavy sour crude’; this is determined by its sulphur content. Light sweet crude oil has little to no sulphur content; if crude oil has greater than 0.5% sulphur, it is labelled as ‘sour’, while anything less than this percentage is categorised as ‘sweet’. The standard measurement for oil density is the American Petroleum Institute (API) gravity scale. This scale ranges from 10 to 70, with higher values indicating lighter oil. Essentially, API gravity offers an inverse relationship with oil density.

Importantly, society does not use crude oil in its original form; it must be refined. Light sweet crude oil is easier to refine and is then used to produce petroleum products, such as gasoline and jet fuel. Brent crude and WTI oil are two of the most well-known oil benchmarks, and both are light sweet crude oils that trade on US exchanges and are priced in US dollars (USD).

Types of Oil: Brent Vs WTI 

Brent and WTI oil are major benchmarks in the oil space, providing traders and investors with a ‘reference price’ for global oil prices. Both oil markets possess a high correlation with one another, as shown below (daily charts of WTI oil and Brent), with WTI oil often a little more expensive than Brent.

Brent oil is extracted from the North Sea, while WTI oil is extracted mainly in the fields of Texas in the US. This is primarily one reason why WTI is nearly always a little more expensive; the cost of transporting the oil by sea is less expensive for Brent. 

How to Invest in Crude Oil?

Nowadays, several avenues exist to trade, invest, hedge risk exposure and diversify one’s portfolio in the crude oil market. 

CFDs:

Contract for Differences (CFDs) are leveraged derivative financial instruments that offer a popular and cost-effective way of gaining exposure to oil prices in the over-the-counter market (OTC). Trading CFDs does not involve taking direct ownership of any underlying asset, including oil products, and are always cash-settled instruments (thus, physical delivery is not a concern). With FP Markets, you can trade price movement of both cash prices and futures prices across several Trading Platforms, such as MetaTrader and cTrader:

Cash Products:

• XTI/USD: West Texas Intermediate Crude Oil Cash
• XBR/USD: Brent Crude Oil Cash

Futures Products:

• WTI: West Texas Intermediate Crude Oil Fut CLK4
• Brent: Brent Crude Oil Fut LCOM4

FP Markets MetaTrader 4 (MT4) 

Exchange-Traded Funds (ETFs):

Crude oil ETFs are another popular method of trading and investing in the oil markets, offering traders and investors the opportunity to invest in a ‘basket’ of securities (oil stocks) that track the price of oil (think ExxonMobil or Chevron, for example) or track an oil benchmark. One such example of the latter is the United States 12 Month Oil Fund (USL), a ‘synthetic ETF’ whose objective is to track the price movement of WTI oil. The ETF fund does not physically invest in the underlying product; instead, it invests in crude oil futures contracts. Another well-known and popular synthetic crude oil ETF is the United States Oil Fund (USO). 

Another alternative for those seeking leverage are leveraged ETFs, a product that duplicates the daily return generally through a leverage factor of 1.5 to 3x.

Futures and Options Contracts:

Many also consider trading and investing in the futures and options market to trade oil, benefitting from both leverage trading through an exchange. However, while seldom executed, physical delivery is possible in these derivative markets.  

The futures market allows participants to buy and sell crude oil at a predetermined price at a future date, hence the name, ‘futures’. The options market, on the other hand, provides contract holders with the right but not the obligation to buy and sell crude oil. One of the attractive aspects of the options market is that contract holders limit their loss to the premium paid.