Trading and Investing in oil: What to Consider
Oil is the most traded commodity in the world. From the earliest years of the Industrial Revolution and internal combustion engines, oil has been at the heart of global industry. As it is usually in steady consumption, oil supply and demand are very finely balanced. For example, in 2019, the world’s daily oil production was 100.58 million barrels per day (BDP), while its daily consumption was 100.74 million BPD. This tight margin generates price and volatility, which many traders try to take advantage of. The slightest movement in either direction opens up the opportunity for a trade.
Because of its importance to the world economy, oil is an intensely political commodity. More than 40% of global supply comes from the 13-nation cartel, the Organisation of Petroleum Exporting Countries (OPEC). OPEC seeks to control production in order to be able to keep prices at a certain level. Another 14% (approx.) is produced by an informal group sympathetic to OPEC. These ‘NOPEC’ countries include Mexico, Norway, and Russia.
Oil traders should closely follow OPEC’s activities and releases. Announcements such as a forced production slowdown, increasing or decreasing production quotas, or other major announcements could generate price volatility.
The US accounts for about 20% of all the oil consumed in the world and, as of 2020, is one of the three-largest oil producers in the world, alongside Saudi Arabia and Russia. Unlike its counterparts, which focus on natural oil fields, the United States’ position has been bolstered by its focus on shale oil production, also known as fracking.
Alongside OPEC, which is led by Saudi Arabia, oil traders and investors will also usually follow news surrounding Russian and American oil activity.
Who should include oil in their portfolio?
Short-term traders: Since oil sometimes displays high volatility, day traders often seek to take advantage of short-term price movements in an attempt to generate profits by opening and closing one, or several positions on the same day.
Mid-term traders: Sometimes oil shows a significant price decline in a short period of time, and then recovers over the course of a few weeks or months. Mid-term traders may try to find the low points, as they see them as an opportunity to buy oil at a discount.
Diversified investors: Oil can sometimes have an inverse relationship with other asset types. Therefore, some investors may use it as a hedging tool when investing in other asset classes.
What type of oil instruments are there?
Oil can be bought and sold through a variety of instruments and derivatives. Naturally, the most basic form is purchasing the crude oil barrels themselves, but this is normally done by the consumers and suppliers of oil, rather than investors.
There are, however, five ways you can trade oil as a private investor. Here are the most common routes into the market:
Oil futures (spot oil) — These are the most common forms of oil trading. Originally, a futures contract was a document that entitled its owner to receive a number of oil barrels when the contract expires. However, over time, the contracts themselves became the commodity. Spot oil (such as the instrument on this page) refers to a derivative based on several different contracts.
Oil futures (monthly) — Another type of futures contract, this instrument refers to a specific contract, which relates to one month.
Oil exchange-traded funds (ETFs) — An ETF is a basket of several assets traded as one instrument. Each ETF is quoted on the stock market and behaves just like any other share, moving up and down. On eToro, there are several ETFs that focus on oil, including USO and XOP.
Energy company shares — Energy giants are among the largest commercial operations on the planet, and make up a sizable portion of global stock exchanges. Their stocks offer straightforward exposure to the oil market.
CopyPortfolios — eToro offers a variety of ready-made portfolios, with thematic exposure to various market segments. In the oil category, eToro offers the OilWorldWide Portfolio, which gives diversified exposure to the various markets relating to oil.
Considerations about the oil market.
The oil market is highly liquid — Excluding extreme circumstances such as the 2020 coronavirus pandemic, traders will most likely never be short of buying and selling options.
The oil market is volatile — It is prone to rumours, political intervention and shifts in forecasts of economic growth. Price swings can be violent and a large chunk of oil production is carried out in places that are prone to instability. Occasionally, the market becomes glutted or demand sinks lower and the price slumps, as happened during the aforementioned pandemic.
Oil trading incurs fees — On eToro, oil is traded as a derivative contract, and therefore, incurs fees. Long-term traders should take this into consideration.
Oil trading FAQs
What type of oil is traded on eToro?
eToro offers trading of a spot oil contract, which is based on the futures contracts of the underlying commodity, West Texas Intermediate (WTI) Light Sweet Crude Oil. The price of the instrument on eToro is derived from the two upcoming futures contracts.
How is the price determined?
The price of oil on eToro is based on the two upcoming futures contracts of WTI Crude Oil. The weight of the nearest future contract decreases as it draws near its expiry date and the price gradually moves towards the price of the next contract.
How are overnight fees calculated?
This calculation adjusts the price of positions which are kept open overnight, as a rollover fee or refund. The adjustment grows as the gap between both contracts expands.
The adjustment can be negative (charge) or positive (refund):
For BUY positions
If the next future price is lower than the nearest, then the position will yield a refund.
If the next future price is higher than the nearest, then the position will yield a charge.
For short (SELL) positions, it is the other way around.
There is an additional charge of eToro’s markup (2.5% annually divided by 365) to the fee.
To find the current fee for one unit, please refer to the Fees Page.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.