Making Money in Oil: How Do You Trade “Black Gold”?

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.

Sign-up with eToro HERE. Instantly get a FREE $100,000 practice account.

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.

One comment

  1. In the US, we have a saying, “here’s my 2 cents worth.” Two US one cent coins are equal to about one Philippine Peso so here is my Peso’s worth. Please remember that free advise is worth what you pay for it so be fully aware of risk as you place your trades. I have a regular weekly income trade that I place using option contracts on USO (the largest most liquid crude oil ETF. ) The USO ETF is NOT a good investment vehicle for long term holds due to the frequently seen contango issues. It should ONLY be used as a trading instrument for the short term I do this whenever crude oil is below the cost of production knowing that. 1. some wells will be shut down, 2. there will be draw-downs normalizing the amounts of oil in storage and finally 3. there are events such as tanker hi-jacking and terror attacks on oil fields or 4. political instability /war that cause the price of crude to temporarily spike up. What I do when the time is right, is sell put options on a scale down, taking assignment as crude oil falls in price. We then write OTM (Out of The Money) call options and roll them up as needed. When we see signs of a top somewhere above our first entry point, we allow assignment and look for an oppertunity to start the same trade again. This is a great reason to LOVE a sideways markets !!! This time may well take much longer for any recovery because there are currently so few consumers with folks quarantined at home, air-line and cruise ships sitting idle etc. so you must exercise great patience if you trade the long side. For those who wish to short oil, there are inverse oil ETFs both leveraged and non-leveraged.

    Now, the big picture, I am seeing a huge influx of “oil is dead, “EVs are rolling out,” “Tesla killer cars,” and still others touting that it is “time to jump back into Tesla.” newsletter promos and “expert opinions” flooding my in-box.

    With all the hype, I sit back with an engineering mindset to make sense of it all. The facts are that we very likely will see EVs (Electric Vehicles) in increasing numbers as part of our future transportation mix. We have to understand that cars and trucks such as the TESLA depend on the power grid to recharge unless you personally own one heck of a bank of solar panels to charge your ride every night. I can tell you without question that the US power grid is nearly maxed out and could NOT handle the load demand if people began making the switch to electric vehicles in large numbers. The fact is, too few new power plants are under construction and part of that is the high cost of licensing and regulations. In the US, power producers and distributors find it more cost effective to sponsor energy audits of your home to help you conserve power and also the companies offer energy efficient light bulbs at cost and super insulated, efficient electric water heaters, again at cost so they will NOT need to build out infrastructure. Conservation is by far cheaper at this point!!!!

    With seven years + and counting living in the Philippines, I will say I am impressed how reliable Meralco has been at least in our area. Typhoons do not appear to have much of an effect on the grid and I have worked online through many storms. This is great but my computer and LED bulb do not consume much power. What happens if all the folks in my subdivision bought a TESLA? We all plug in at night. Then the subdivision a short distance down the road? Soon, I think the power grid would not be able to handle the demand. Think, when do we usually have a failure? Hot summer days when all the air-conditioners are running full blast. I think we here in the Philippines will also have to consider more power plant construction and build out of the grid system to accommodate EVs in the future.

    These days there is again a lot of talk about hydrogen fuel cells powered electric cars. No need to plug in and charge for a few hours or overnight. Just “fill her up” at a fuel station and be on your way. ZERO emissions, clean, pure water is the by product! Wonderful but wait, you have to install fuel stations at reasonable distances form each other to make this work. I recently read that there are currently around 900 such hydrogen fuel station worldwide, not nearly enough to make hydrogen a viable transportation fuel for most folks. You must also have be able to produce the needed hydrogen gas and that takes energy. NO FREE LUNCH. It is true that hydrogen is one of the most plentiful elements on earth but it is NOT a free fuel.

    To close my diatribe. I have great hope for the future and I think EVs (both plug-in rechargeable and fuel cell power-plants) will be part of the mix. I also fully understand that we must build out the infrastructure to meet that future demand. That will take time. In the interim, we will still be using some amount of crude oil for transportation and other energy needs. Crude oil is getting more and more difficult to extract and therefore the cost of production / barrel will only rise over time. At some point, we will see a solid bottom and then off to the races. Hopefully, we as a society will use this beak in price to get ready for the future?

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