Updated: February 21, 2021
The week of 20 April 2020 will definitely go into history books because for the first time, the West Texas Intermediate (WTI), the U.S. oil benchmark, dived down into negative territory.
What does this mean?
If I were an oil seller and you were a buyer, a negative price means I’m willing to pay you if you’d be willing to take my oil.
Crazy, right? That’s why Wall Street veterans, among others, described the event as “scary,” “unprecedented,” and “visceral.”
As of writing, the WTI Crude Oil Price is already up at around $16.00 from that historic price plunge of $-38.30 last week. And it has slowly been inching back up in recent days.
Will it continue to go up or go down again next week? What about next month? Or next year? Nobody really knows.
But the good news is that, regardless of what direction it takes, there’s an opportunity for you to make money by trading OIL, especially if you have a trading account with a global broker like eToro.
How the OIL trading works
In the early 1900s, in order to trade oil, you would need to actually buy physical oil barrels, store them somewhere, and then ship them to your buyer.
Luckily, nowadays you don’t need to. In fact, you don’t even have to see the physical oil itself. That’s because most oil and gas trading is handled via futures.
What are oil futures?
Oil futures are contracts in which you agree to exchange a set amount of oil at a set price on a set date. They are traded on futures exchanges and brokers, and are the most commonly used method of buying and selling oil.
While actual oil importers and exporters use futures to insure against the adverse effects of oil price volatility, you as a trader can use them to speculate on oil prices without buying or selling the commodity itself.
That’s because the prices of oil futures will move as the value of the real, physical oil goes up or down.
So instead of buying oil, storing it, waiting for its price to increase and then selling it on and arranging for it to be delivered, you can buy a futures contract and then sell it when you want.
In doing so, you’re taking advantage of the same increase in price without the same logistical effort.
2 Easy Ways of Trading OIL
1. Trade via CFDs
The issue with buying and selling contracts in a commodities exchange is that you need a large number of orders. You cannot just buy these oil contracts with your $100 spare change because they’re worth thousands of dollars.
And that’s where CFDs come in.
CFDs, or contracts for difference, allow you to trade on the changing prices of oil without buying and selling the contracts themselves. And instead of trading on a commodities exchange, you create an account with a broker.
This brings several benefits for oil traders:
- You can trade on the spot prices of oil benchmarks, as well as futures and options.
- You can go both long and short on a huge variety of oil markets, on a single platform.
- You don’t have to be a professional to get started making money from oil trading.
2. Invest in OIL companies
Instead of trading actual oil which may be volatile and lead to wild price swings, you can invest instead on oil companies and oil exchange traded funds (ETFs).
There are oil companies like Murphy Oil Corp. (code: MUR) and Cheniere Energy Inc. (code: LNG) that has been doing good fundamentally in the past year. And there’s also the United States Oil ETF (code: USO) among others.
The prices of oil companies are heavily influenced by the price of oil, and in some cases offer good value compared to trading oil itself. You can use ETFs to invest in oil benchmarks or a basket of oil stocks.
The advantage of this is that even if the price of oil becomes negative or changes rapidly if the oil company you are investing in has sound and good fundamentals, your investment still has value and can reasonably recover or even go higher.
Is now a good time to invest in OIL?
Oil is the most actively traded commodity, so expect its price to be very volatile.
Throughout history, oil prices have risen and fallen, quite spectacularly at times, on the back of changing business landscapes.
For traders and investors, these oil price movements can present attractive opportunities. This is particularly true when oil prices crash, as they tend to rebound quite quickly.
During the global financial crisis of 2008/2009, for example, the price of West Texas Intermediate (WTI) crude oil dropped from around $145 per barrel to around $30 per barrel. That’s a decline of roughly 80% in less than six months.
However, after the global financial crisis, the price of WTI crude oil rebounded back up to $110 per barrel by April 2011. That’s a rise of more than 250% in just over two years on the back of supply cuts and an increase in demand.
Now, when this pandemic ends, it is possible that history would repeat itself and oil prices rally up as businesses resume their operations, especially airline and shipping companies, as well as factories and manufacturing.
Are you just going to watch? Or are you going to make money from this event?
You can actually do it risk-free and trade OIL with a virtual account. How? Just sign up with eToro.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.