You may have heard that oil is a non-renewable resource and you already know how much the global economy depends on it. So you may think that the price of oil will always be on the rise. In this article, we’ll go over the pros and cons of buying oil futures and explain why it’s riskier than it may seem but also why it could be a great investment. When you buy oil futures, you’re betting money that you know how the price of oil will change in the future. You may want to consider working with a financial advisor to determine whether this is a good option for your portfolio.
How Oil Futures Work
When you invest in oil futures, you’re not actually investing in the oil itself. This means you don’t have to store barrels of crude oil in your garage. Instead, you’re investing in a futures contractand betting on the price of oil. There are other forms of oil-related investments, like buying shares in oil companies or oil ETFs.
But let’s focus on oil futures.When you buy oil futures,you’re taking a position on the movement of oil prices. This could be a long position (you’re betting that oil prices will rise) or a short position (you’re betting that oil prices will fall).
Let’s say you decide to take a long position on oil prices. You buy a stake in an oil futures contract on theNew York Mercantile Exchange (NYMEX) through a broker, paying a certain price per barrel of crude oil for 1,000 barrels. Later, you learn that the price per barrel has risen, so you decide toexit your positionby selling your side of the futures contract.
You just made a profit in that example, once you subtract your initial investment and thefees you paid. But if oil prices had dropped, you would have lost money. It’s also possible to buy futures on margin, meaning that you only have to put up a fraction of what your stake is worth. This means you stand to make bigger gains, but it can also lead to bigger losses. It’s a good idea to approach this strategy with caution as it’s not like investing in a safer vehicle like bonds.
It’s easy to read news about movements in oil prices. You hear on the news when prices rise and fall, but to succeed as an investor in oil prices, it’s not enough to react to that news. You have to find a way to anticipate the changes.
You may read that prices have risen and decide to take a long position, assuming that that trend will continue. But if there’s one thing to remember about investing, it’s that past performance is not a guarantee of future returns. In other words, you can’t know that oil prices will continue to rise. In fact, oil prices are quite volatile. That means you stand to lose the money you invest.
If you still want to try your hand at trading oil futures, you’ll need to go through a brokerage firm, and not all firms give the option of investing in commodity futures. When you find a brokerage firm online that lets you trade futures, it’s important to check its credentials against SEC and FINRA records.
Confirm what your liability will be if you trade on margin, and start small. Oil futures are not the place to put your retirement savings or the down payment you plan to make on a home one day.
The Bottom Line
The average investor doesn’t need to dabble in oil futures – or any kind of commodity futures trading for that matter. We’re all busy with jobs, friendsand hobbies. There’s no need to take time out of your packed schedule to research oil prices and try to get rich by speculating on oil futures (unless you want to and have the money to lose, of course). The average investor will likely be betteroff looking for less risky, low-fee investing options that you can “set and forget.”
Before investing in anything remotely risky you may want to first run your plan by a professional. Financial advisors can help you create an investment plan and help you understand what investments will lead you toward your long-term financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You may want to also run any potential investments through an investment and return calculator to help you understand your potential with the asset.
With crude oil futures you can trade nearly 24 hours a day during the trading week and take advantage of potential trading opportunities regardless of market direction. Crude oil futures also provide the ability to trade with greater leverage and can allow a more efficient use of trading capital.
There are two basic positions in oil futures, as in all trading, long and short. A long position is when you buy the contract and you benefit should the traded price go up. Short is the opposite, where you sell it and make money if it goes down.
Oil futures are financial contracts in which a buyer and a seller agree to trade a specified number of barrels of oil at a fixed price set for a future date. Crude oil futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at, or before, the contract's expiry.
It's generally better to buy oil stocks when oil prices are low and expected to rise rather than when they are already high. However, the price of oil affects different types of oil stocks in different ways. Checking out the recent price of oil is a critical first step in oil investing.
What futures are most profitable? Trading in futures markets such as the Micro E-Mini Russell 2000 (M2K), Micro E-Mini S&P 500 (MES), Micro E-Mini Dow (MYM), and Micro E-Micro FX contracts can be highly profitable due to their distinct market characteristics.
This can be a risky form of trading, but it also has the potential to generate large profits. If you are starting with a small amount of capital, such as $10 to $100, it is still possible to make money on futures trading.
To apply for futures trading approval, your account must have: Margin approval (check your margin approval) An account minimum of $1,500 (required for margin accounts.)A minimum net liquidation value (NLV) of $25,000 to trade futures in an IRA.
You buy a stake in an oil futures contract on the New York Mercantile Exchange (NYMEX) through a broker, paying a certain price per barrel of crude oil for 1,000 barrels. Later, you learn that the price per barrel has risen, so you decide to exit your position by selling your side of the futures contract.
Futures are financial contracts obligating the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price. They are standardized contracts traded on futures exchanges.
Avenues include buying stocks of oil and gas companies, such as producers, refiners and master limited partnerships (MLPs). Mutual funds and exchange traded funds (ETFs) can make this process easier by wrapping multiple stocks into one pooled investment.
The rising tide of higher oil prices should lift all boats in the oil patch. However, Chevron (CVX 0.75%), Devon Energy (DVN -0.46%), and Diamondback Energy (FANG -0.77%) stand out to a few Fool.com contributors for their ability to cash in on higher oil prices.
Market participants not only buy and sell physical quantities of oil, but also trade contracts for the future delivery of oil and other energy derivatives. One of the roles of futures markets is price discovery, and as such, these markets play a role in influencing oil prices.
A futures contract specifying the earliest delivery date. For gasoline, heating oil, and propane each contract expires on the last business day of the month preceding the delivery month. Thus, the delivery month for Contract 1 is the calendar month following the trade date.
Yes, it is possible to lose more money than you initially invested in futures trading. This is because futures contracts are leveraged, which means you can control a large position with a relatively small amount of investment upfront. 9 While leverage can amplify your gains, it can also magnify your losses.
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