Oil money is the subject of political drama, vast fortunes, global commerce, international conflicts, and everyday life. However, you don’t need to be some sort of oil drilling business mogul in order to make money investing in oil.
Anyone with modest savings and internet access can make money in the oil markets.
Oil is the essential fuel of modern civilization. Without it, the entire modern world comes to a halt. It fuels the flow of goods in free trade, it fuels the transport of people throughout the world, and it even fuels the armies of nations in every corner of the Earth.
For this reason, the flow of oil and oil products is very lucrative and is even a matter of national security. Everyone involved in the oil business, from the plant worker to the top oil trader, is benefiting financially from the health and demands of the oil market.
The everyday investor may see this and assume that oil investing is only for people in big business, but this is not true. There are many ways that a retail investor can get involved in the oil market, but there are a few things that we must first understand before we dive in.
The price of crude oil is the core factor of the oil market. Oil producers want the best possible price for their product, and oil consumers want low prices on oil products like gasoline. If the price is too high, then many aspects of the economy cannot function.
If you’ve lived through an oil crisis, then you can understand firsthand how supply and demand affects prices. The demand for oil is always growing as populations and economies expand. The supply is also growing, but it can be influenced by political drama and oil coalitions.
Many of the most oil-rich nations are allied in an oil-producing coalition called the Organization of the Petroleum Exporting Countries, or OPEC for short. These nations get together and decide to limit their oil production in order to keep prices high and keep the money flowing.
If OPEC decides to curb production, or a war begins in an oil-producing nation, then oil prices will go up. If peace and diplomacy prevail, or non-OPEC nations produce more oil, then crude oil and oil products become more affordable.
Now that you understand the very basics of oil supply and demand, let’s take a quick look at all of the products that allow you to invest in oil.
The most direct way to invest is to buy physical barrels of crude oil with futures contracts. A futures contract allows you to own 1,000 barrels of crude oil at a time, on paper.
Single contracts can change in value by thousands of dollars in a matter of minutes. In other words, you can make or lose a lot of money in a very short period of time. This is the most powerful way to trade oil, but it is also the most difficult and risky.
The United States is the top oil consumer in the world, so the most popular oil futures contract is on the West Texas Intermediate (WTI). The second-most popular market for crude oil is in Europe, and this is accessible through Brent Crude Futures.
Buying and selling commodity futures in crude oil is only recommended for highly skilled and experienced investors. It is a worthwhile goal if you really want to make the most of the oil market, but for everyday investors it is a tall order and a serious risk.
Trading small oil contracts
If you’d still like to get your feet wet in oil commodity markets, but you don’t have a ton of money or trading experience to work with, then consider the Small US Crude Oil (SMO) contract from The Small Exchange.
This contract is worth roughly 100 barrels of oil, versus the 1,000 barrels of oil in the standard crude contract. The underlying tick price is $1 per $0.01 tick. This means that the contract moves by $0.01 at a time, and the contract changes value by $1 for every $0.01 movement.
The minimum initial margin for this contract is much lower than the margin required for a full oil futures contract from the CME. It is a good way to access the oil markets as a beginner with low capital, but it can still be relatively risky given the volatile price of oil.
Less risky than buying and selling oil directly is buying and selling shares in public oil companies. These companies drill, process, transport, and sell crude oil and oil products.
Many of these companies are vertically integrated, meaning they handle everything from drilling the oil, turning it into gasoline, and selling it to you at the pump. Others focus more on secondary petroleum products, like drugs, plastics, airplane fuel, asphalt, and synthetic fabrics.
The top oil companies, or “Big Oil”, are seven supermajors: BP, Chevron, Eni, ExxonMobil, Royal Dutch Shell, TotalEnergies, and ConocoPhillips. These companies dominate the world oil industry and their stock can be bought through everyday retail brokers.
Oil funds and other advanced products
Even safer than picking top oil stocks or scoping out smaller oil stocks is investing in publicly traded oil funds. These funds are managed by investment professionals and offer a sophisticated means of getting the most out of oil companies in the stock market.
This is often a smarter move to simply invest in these funds. They employ professionals who spend their days studying the market and investing your money.
If you’d like to purchase any of these investment products, you will need an investment account with a registered retail broker. These brokers will allow you to trade stocks, futures, funds, and more. This includes all of the above oil investment products.
However, trading and investing is risky. Do not take large risks if you are not completely prepared to manage your risk. Perform careful research on any investment product before making a purchase, and do not attempt to trade commodities without proven success.
Every year, millions of people take on huge retail investing risks and lose their money. The allure of quick profits in oil is great, and this makes people careless with their money.
If you want to make money in trading oil, you need to be smart and prepared. Learn to manage risk, research investments, and understand markets. This may require serious professional education and experience. It is not for the faint of heart.
If the idea of trading oil is overwhelming, then carefully allocate a portion of your investment portfolio to high performing oil funds. Oil-based ETFs are the most risky, yet the most rewarding. Oil-based mutual funds offer steady growth and low-risk exposure to the oil market.