Trading oil: everything about oil investing

Oil is sometimes called black gold, and for good reason. It is considered as one of the most important commodities and determines the health of the entire economy. Oil reserves are running out and the battle for the rare black commodity will only increase. But how can you, as a private investor, benefit from this? In this article we will discuss how you can invest in oil.

Start to trade oil in three steps:

Fun-fact: You can trade oil 100% risk-free through a demo account.

How to invest in oil?

In the first part of the article we looked at the various possibilities to invest in oil: direct trading in oil, buying oil shares  and  trading funds.

Direct trading in the price of oil barrels

You can choose to trade directly in oil barrels. Crude oil is more difficult to store than, for example, gold. You cannot buy and just store the oil drums in your backyard. Fortunately, with derivatives, you can speculate on the price development of oil. You can do this with CFDs, futures or options. Let’s see what the best options are.

CFDs on oil

If you want to speculate in oil barrels in the short term, CFDs are interesting. When you trade in crude oil with CFDs, you pay a specific amount in dollars and the barrels are then placed at your open positions. Of course, the barrels are never actually delivered, so only the price increase or decrease is important. Here you can read more about how trading with CFDs works.

CFDs are perfect for speculating on crude oil price changes. You can also speculate on a price drop with CFDs. A good broker to trade in oil CFDs is Plus500. At Plus500 you can try out the possibilities completely free of charge and without risk. Use the button below to open an account immediately:

76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Oil Futures

The best known way to invest in oil is by using futures. The best known futures are crude oil (CL) and Brent Oil (CL) futures. Futures are delivery contracts that allow you to receive a fixed amount of oil at the expiry date. Futures are often not a good choice for first-time investors.

With a future, you immediately have a multiplier of 1000. One contract is concluded at a value of 1000 barrels. This can cause your winnings and losses on a contract to fluctuate greatly. In addition, you have an obligation to take the oil barrels at the end of the term. This fact led to a huge crash in April 2020, with the oil price even going negative. Because no one actually wanted to receive the oil, the price crashed enormously.

Oil options

You can also choose to invest in oil by using options. With an option, you have the option, but not the obligation to buy or sell oil at a fixed price. With a call option, you have the possibility to buy oil at a certain price and with a put option, you have the option to sell at a certain price.

Each option has an expiration date. If the option does not yield an attractive profit before the expiry of the option, you will lose the entire value of the trade. Do you want to know more about investing in options? In this article you can read all about it!

investing in oil online

Investing in oil shares

It is also possible to invest indirectly in oil. One well-known way you can invest indirectly in oil is by buying shares in oil companies like Shell or BP. When you invest in stocks, it’s not just the price of oil that determines your results.

BP’s oil spill in the Gulf of Mexico in 2010 caused a lot of civil unrest. This unrest caused a sharp drop in BP’s share price. When the price of oil rises, the price of an oil company can still fall. When you invest in an oil company share, it is therefore important to study the company’s results carefully.

There are two ways you can invest in oil companies’ shares. The first is to buy the shares directly and hold them within your portfolio. This can be a good strategy if you want to invest in oil in the longer term. One place where this is possible is eToro.

It is also possible to actively trade in oil companies’ shares. There are several brokers where that is possible. Want to know where to invest in oil stocks? Have a look at the broker overview immediately:

investing in oil shares

Investing in a fund or ETF

The final way you can invest in oil is by buying stakes in a fund, also called an ETF (exchange-traded fund). You can distinguish between two types of funds: share funds and funds that try to follow the oil price directly.

Share funds follow a steady number of shares related to oil companies. Examples of European ETFs are Lyxor ETF STOXX EUROPE 600 OIL and GAS and iSHARES STOXX 600 OIL & Gas UCITS EFT DE. If you want to invest in the global market, you can invest in the SPDR MSCI World Energy UCITS ETF.

Oil funds try to track the course of oil. They usually do this by buying up futures. Examples of funds that try to track the oil price in this way are UCO and USO. The disadvantage of these funds is that they have to continue to roll over futures to the following month. The new futures are typically more expensive, because few people are waiting for the actual supply of oil. As a result, you can only benefit from these types of funds when the price of oil rises very sharply.

How can you predict the price of oil?

When you want to invest in oil, you must keep a close eye on the price. In this part of the article we look at how you can predict the price of oil, both in the short and  long term.

Oil price short term

In the short term, the price of oil may fluctuate sharply. There are many groups that influence the price of oil. After all, the oil price is ultimately determined by the balance between supply and demand. For example, if OPEC decides to export more oil, the price of oil will fall due to the increase in supply. However, a conflict in a country that exports oil can push up prices. In that situation, people get nervous about future oil supplies.

Therefore, in the short term, the price of oil is difficult to determine. Although there is usually a clear direction in the price development, it can suddenly change because of an important event somewhere in the world. For that reason, oil is a popular trading instrument for day traders, investors who actively invest every day.

Therefore, it is advisable to keep a close eye on the news reports. With each news story, consider the effect it will have on the average investor. Consider the following examples:

  • A news report about the US deciding to tap into their oil reserves (1).
  • A news report stating that consumers are increasingly using their car (2).
  • There is a war going on in a major oil producing region (3).

In general, news reports where the supply of oil increases lead to a fall in the price (message 1). When demand seems to increase, the price usually rises (message 2). Finally, a decrease in supply can also lead to an increase in prices (message 3).

predict oil priceMajor events have a strong effect on the price of oil shares

Oil in the long term

Oil is clearly becoming scarcer: the emergence of new major players on the world stage such as China will only increase oil consumption in the coming years. According to recent predictions, it will only be 40 years before the oil supplies are fully depleted. At the moment, oil seems to be a great investment. As stocks continue to decline and consumption continues to increase, it is not unrealistic to assume that the price will rise further.

However, it is also important to keep an eye on alternative energy sources. Oil and other fossil fuels are losing popularity because of the pollution they cause. Because of this, several companies are looking for alternative fuels. It may be that in the future an alternative source of energy will become the dominant factor. However, at this moment this is far from the case and until then, it may be attractive to invest in oil!

What should you pay attention to when investing in oil stocks?

Many people invest in oil stocks because of its stable nature. In the short term, the price of oil can fluctuate considerably. Nevertheless, the economy is running on oil and the price always reaches new peaks. But what should you actually pay attention to when selecting and buying oil shares?

Consider what you want to invest in

Of course, everyone knows dominant parties like Shell and Total. However, there are many more companies active in the oil production process. When you invest in oil, you can invest in three different stages of oil processing: the upstream, midstream and downstream.

The upstream sector  is mainly concerned with oil exploration and production. Companies in this sector are looking for ways to get oil out of the ground. For example, a company like Fugro is looking for suitable locations to drill for oil. Other companies are again engaged in producing material or supplying labour. When the economy is doing well, these types of companies do well: there is more demand for higher production.

The midstream sector  is engaged in the transport and storage of oil. This sector is the link between the upstream and downstream sectors. Examples of companies active in this sector are Vopak and Scorpio. A company that deals with the storage of oil can also do well at a low oil price. In this case, there is often overproduction. These companies are then required to store all the oil that is not used.

The last sector that deals with oil is called the downstream sector. This sector refines crude oil and then processes it into a usable raw material. Crude oil still needs to be converted to, for example, petrol for your car, asphalt or kerosene. Companies involved in this step in the production process include Marathon Petroleum and Exxon Mobil.

Many larger oil companies are engaged in different components in the oil production process. Research in which market conditions the company you want to invest in does well. Some stocks may be less dependent on the price of oil than others.

Ensure sufficient diversity

Also, when you want to invest in oil by buying shares, you need to diversify sufficiently. It is unwise to put all your money into one oil share. Even in the case of a high oil price, a company can still go bankrupt. Mismanagement or fraud can change a company from a top-tier company to a total flop in a day.

Therefore, do enough research when you invest in oil stocks. It’s important to understand how a company makes its profits.

Make a plan

Buying and selling oil shares indiscriminately during a crisis is not a good strategy. It is important to make a plan. First, think about why you want to buy shares. Do you want to build an income by buying stocks that pay a high dividend? Then an investment in Shell could work out well. Do you want to get a high price gain? Then you may need to invest more actively.

Determine for yourself what your goal is and then write down what your price target is. That way, you keep following a clear plan and don’t lose unnecessary money when you panic.

Pay attention to the cost

When you start investing in stocks, it is essential to pay attention to the costs. By investing with an expensive broker, you sometimes lose out on many thousands to tens of thousands in the long run. Do you want to know which brokers you can invest with the cheapest? In our overall overview you can immediately see what the best party is to start trading oil stocks:

How can you make money from falling oil prices?

It is also possible to make money from falling oil prices. You do this by placing a short position on the price of oil. When you open a short position, you place an order on a falling oil price. This has the following effect:

  • When oil prices go up, you lose money.
  • When the oil price falls, you make money.

Current oil price

Do you want to start investing right away?

Before you decide to invest in oil, it is wise to practice with a free demo account first. This makes it possible to learn the basics of investing first, so you can make a successful start.


Alex Mostert Avatar

When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about! Don’t hesitate to leave a comment under this article.

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