Investors interested in adding another investment to their portfolio may consider oil futures. It checks all the boxes for an aggressive investor: Oil futures are speculative, highly volatile, and involve borrowing on the margins of profit (and loss).
Interested in investing in the future of oil? Here’s what you’ll want to know.
Read more: Oil trades like a meme stock – that’s why it’s not one
Investing in oil futures is buying or selling a contract at a predetermined future price of 1,000, 500, or 100 barrels of oil. The contracts are usually traded in West Texas Intermediate crude oil (CL=F), the US market standard, and Brent Crude (BZ=F), the international oil benchmark.
Most investment brokerages do not offer futures trading, but Charles Schwab, Robinhood, Coinbase, E-Trade, Interactive Brokers, NinjaTrader, TradeStation, and Webull.
To be authorized to trade in commodities, brokerages generally need to:
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Minimum account balance as required by the brokerage
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Margin approved account (brokerage loan approval)
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Appropriate investor risk profile form on file
Traders may use oil futures to hedge other petroleum-related investments, such as oil, gas, and petroleum exploration company stocks.
How oil futures trading works:
You buy a futures contract if you expect oil prices will rise.
You sell the contract if you believe oil prices will fall.
Another very good way to determine whether futures trading is right is to use a trading simulator. Before you commit real money to the oil futures market, you can test your ideas in a trading simulator with live market data.
As you gain experience in the practice of futures trading, without risking any money, you can build confidence in your strategies and be ready to put money on the line.
Read more: 5 ways oil prices over $100 a barrel can hit your wallet
Futures trading is often powered by margin accounts. That increases the position while using less upfront money. You make a trust deposit in your account, from which 2% to 12% of the contract value is deducted. A minimum margin balance must be maintained, known as a “margin call.”
Charles Schwab offers an example:
“If a trader expects crude oil prices to rise, he may buy Micro WTI crude oil contracts at $65 per barrel, placing at least $2,550 in the initial limit (good faith deposit) to establish a futures contract position with a notional value of $32,500.
“If oil rises to $66, the notional value of the futures position will be $500 ($1 x 100 barrels x 5 contracts) to $33,000. If the trader sells those five contracts at $66, they will pocket $500 in profit minus transaction costs.
“But if the price of oil falls, this same ratio can work against the trader, increasing the loss.”
The Commodity Futures Trading Commission is warning investors to approach the market with caution.
“Speculating on the futures of commodities and options is a volatile, complex, and risky business that is rarely suitable for individual investors or ‘retail clients,'” the CFTC noted in an educational piece. “Many people lose all their money, and may have to pay back more than they originally invested.”
Read more: What is the Strategic Petroleum Reserve, and can it help lower gas prices?
If you’re not ready to jump into oil futures just yet, other options are available:
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Oil exchange rates: ETFs like USO (USO), BRNT (BRNT.MI) (BRNTN.MX), DBO (DBO), and OILK (OILK) track oil prices. Fee rates range from 0.60% to 1.43% or more.
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Energy Stocks: Oil company stocks such as ConocoPhillips (COP), Occidental Petroleum (OXY), and Texas Pacific (TPL) can provide exposure to this sector.
