Markets of oil can be just as confusing to the novice as they are to the professional investor. For one thing, there are huge fluctuations that occur in prices in these markets, sometimes taking place on an almost day-to-day basis. If you wish to partake in commodities trading, mainly in the oil market, you should have an overview of the forces that are responsible for driving this market. Oil is the most traded of commodities today, and the oil market is a very crowded place. Therefore, the only way to have some hold and control over it is to understand the stakes in the market, and primarily determine your own stake in oil within your financial portfolio.
What You Should Know In Brief
In the commodities markets, the price of oil is largely determined by the factors of demand and supply. However, the supply of oil is controlled, to an extent, by the OPEC (Organisation of the Petroleum Exporting Countries) cartel. Different grades of oil exist, and if you start indulging in online commodity trading, you will discover this. The different grades trade within distinct markets, like the WTI (West Texas Intermediate) or Brent.
Further, you should also know that oil is viewed as a commodity that helps to diversify a portfolio. It is also a hedge against inflation, sharing this unique trait with a metal, gold. So if you open a demat account and have stocks in your portfolio, having oil there would mitigate risks. The purchase and sale of physical oil is not undertaken by investors. However, liquid markets tracking the prices of oil can be discovered through options, futures, oil company stocks, or ETFs. Within India, crude oil trading takes place in the futures market.
Demand for Oil
Before you begin your commodity trading foray in oil, you should understand that oil is a global commodity. The EIA (US Energy Information Administration) estimates that the demand for oil, globally, will be at some 98 million barrels/day by 2023. This, if estimates ring true, will be a new all-time high. When the prices of oil go up, the demand for the commodity decreases in developed nations. Commodities trading may then take place in these countries as prices go down. However, the demand for oil in developing and emerging nations rises in such circumstances. This is because these nations continue the process of industrialisation regardless of the prices of oil.
Several emerging countries offer fuel subsidies that consumers may avail of. Nonetheless, subsidies may not always be advantageous to the economy of a country. They may spur on demand in a country, but they can also result in any country’s producers of oil to sell at losses. If a country removes subsidies of oil, it allows the country to enhance the production of oil.
Supply of Oil
Online commodity trading allows you to trade in oil stocks, futures and options, and ETFs in oil. How to trade in oil is a fairly simple process, much like you trade in equities with the help of a good brokerage. The key to the process of trading in oil, just like it is for any other asset, is to know what factors affect your trading. As much as you should have some idea about the aspect of demand of oil and how pricing gets influenced, supply is an aspect to consider while you trade in oil too.
The estimates for oil supply for 2023 are at 101 million barrels/day, a record in production rates. It should be noted here, though, that oil exploration has slowed down somewhat. In 2017, for example, the discovery of fresh reserves was the lowest compared to the 1940s. The problems of discovery are largely the result of budget cuts for oil exploration. These have been gradually occurring since 2014, due to a fall in oil prices in 2010.
Speculation and Investment
Besides the factors of supply and demand in oil commodities trading, the other force that motivates different prices of oil is the investor and speculator community that bids on oil futures contracts. Nowadays, there are more institutional investors engaged in trading in oil commodities than was previously the case. For instance, endowment and pension funds hold investments that are commodity-linked as part of an asset allocation plan for the long term.
Ways to Invest
Acquiring knowledge about the oil markets is the key to how you invest in oil as a commodity. The actual process of investing is not challenging. The simplest way to invest for an average investor is to buy stocks of an oil drilling company. Investors can also purchase stocks of an oil services company. If investors make purchases of energy sector ETFs, they can get a more direct exposure to oil as a commodity. Many sector mutual funds investing primarily in energy-linked stocks are available as well.
In terms of online commodity trading, oil is traded on the MCX in India. This is the Multi Commodity Exchange of India Limited, where you can trade in oil stocks, apart from other commodities. You may either place an order directly with your own broker, as you do to trade stocks, or you can buy the stocks directly online by creating some login details and a password. If you wish to trade in futures contracts in crude oil, this is an option in India too.
Investing in Oil
In terms of importance, oil is as crucial as gold. Only, you cannot hold it in physical form. You can invest in it, and you will have to open a demat account if you wish to buy oil company stocks or trade in crude oil with futures contracts. If you are buying futures contracts in crude oil, you should know that they are traded in lots of 100. So you can buy 100, 200, 300, and so on. The best part of futures contracts is that you do not have to pay the full amount of units traded upfront. Besides oil, to diversify a portfolio further, you can go in for any upcoming IPO after doing some background checking.
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