4 Ways To Invest In Oil

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Oil is the most widely traded commodity but for the average investor, there are the obvious impracticalities of storing barrels of oil. So how can we invest?

Photo Credit: Paul Keith Photo, Flickr

Option 1 – The Futures Market

The futures market could be the best option for many investors and speculators. There are many advantages to using the futures market. Firstly, oil futures are traded on margin which means you don’t have to put up the full price of the contract, only the margin requirement and the maintenance requirement. Typically the margin requirement for 1 standard oil future contract, which is worth around $90,000 currently, is around $4000. The maintenance could get quite oil is price goes against your position.

Other things to consider with the futures market is oil futures can go into backwardisation and contango. Contango is where contracts that have a longer expiry are a higher price than the near months. Backwardisation is the opposite. If you want to go long on oil, you can make an addition return from backwardisation, however the reverse is true if they are in contango.

Option 2 – Oil ETFs

Oil ETFs are another option to consider. They require no knowledge of any of the financial markets. However, they are not guaranteed to follow the price of oil. Many of them in the past have not tracked it well at all and left investors disappointed.

Option 3 – The Forex Market

The Forex Market is another option. Canada supplies America with a lot of it’s oil. As a result of this the currency pair USD/CAD has had a close long term inverse correlation with oil. This means when oil has gone up, USD/CAD has gone down. Another pair that has close correlation is CAD/JPY.

Option 4 – Oil Stocks

The stocks of the major oil companies are closely correlated to the price of oil. They can be a very useful way to invest in oil. They can be purchased through a stock broker. Many CFD brokers allow you to trade oil stocks on margin, however this will usually involve financing costs.

This article was written by Peter Marsden who runs a site about Futures Trading

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