How to Buy Oil Commodity: Ways to Get Started

Oil is a globally traded commodity, foundational to the world economy as a primary energy source and raw material. For individuals, “buying oil commodity” usually means engaging with financial instruments that track oil prices, not acquiring physical barrels. This article guides you through avenues to gain exposure to oil prices, explaining their mechanics and application.

Different Approaches to Oil Commodity Investment

Oil investment uses distinct financial instruments, each with varying directness and risk. Oil futures contracts offer primary direct exposure to price movements. A futures contract is an agreement to buy or sell a specific quantity of oil at a predetermined future price, providing leveraged exposure. These contracts have set expiry dates and must be settled.

Exchange Traded Products (ETPs), including ETFs and ETNs, offer an accessible way to invest in oil without direct futures trading. Oil ETPs track crude oil prices, often through futures contracts, or invest in oil and gas company stocks. These products trade like stocks on exchanges, making them easy to buy and sell through a brokerage account.

Investing in oil company stocks provides indirect exposure. These companies engage in exploration, production, refining, and distribution. Their profitability and stock prices are influenced by oil prices, company-specific factors, operational efficiency, and broader economic conditions. This approach offers a different risk profile than direct commodity investments.

Getting Ready for Oil Futures Trading

Oil futures trading requires preparatory steps and understanding market mechanics. First, choose a specialized futures brokerage account, which differs from standard stock accounts. These accounts are regulated by the Commodity Futures Trading Commission (CFTC) and require adherence to specific margin and regulatory standards. Futures Commission Merchants (FCMs), brokers handling futures transactions, must meet minimum capital requirements and are members of self-regulatory organizations like the National Futures Association (NFA).

Understanding oil futures contract specifications is important. A standard West Texas Intermediate (WTI) crude oil futures contract, traded on the New York Mercantile Exchange (NYMEX) through CME Group, represents 1,000 barrels. Each contract has defined tick sizes, values, expiration dates, and delivery months. These details help calculate potential gains and losses.

Margin requirements are key to futures trading. Initial margin is the upfront deposit to open a futures position, around $5,000 per crude oil contract, though it varies by volatility and exchange rules. Maintenance margin is a lower threshold, 50% to 75% of the initial margin, that must be maintained. If the account falls below maintenance margin due to adverse price movements, a “margin call” requires additional funds to avoid forced liquidation.

Placing Oil Futures Trades

After preparing for futures trading, execute and manage trades through a brokerage platform. Traders use various order types to manage entry and exit points. A market order instructs to buy or sell a futures contract immediately at the best available price, prioritizing speed. While simple, market orders can result in executions at prices different from what was observed, especially in fast markets.

Limit orders provide more control over execution price, allowing a trader to specify a maximum buy price or a minimum sell price. A buy limit order is placed below the current market price, a sell limit order above. This ensures the trade executes at the desired price or better, though execution is not guaranteed if the market does not reach that price.

Stop orders trigger a trade once a specific price, the stop price, is reached. A buy stop order is placed above the market, a sell stop order below. Once the stop price is hit, the order converts into a market order, executing at the next available price. Stop orders do not guarantee a specific execution price and can experience slippage in volatile conditions.

Monitoring and managing open positions is an ongoing process. Traders continuously track profit and loss, which fluctuates with market movements. Positions can be closed by placing an offsetting trade before expiry to avoid physical delivery. Failing to close a physically settled contract like WTI crude oil futures before expiry obligates the holder to take delivery at a designated location, such as Cushing, Oklahoma.

Investing in Oil-Related Exchange Traded Products and Company Stocks

For many, gaining oil price exposure through ETPs or company stocks is more straightforward than futures trading. Begin by opening an investment brokerage account, accessible online, often with no minimum deposit. These accounts allow for purchasing stocks, ETFs, and other securities. Account opening requires personal details like name, address, Social Security number, and employment information.

Once the account is established and funded, investors can research specific oil ETPs and individual oil company stocks. Oil ETPs track crude oil prices through futures contracts or invest in oil and gas company equities. When selecting an ETP, consider its expense ratio, the annual fee charged as a percentage of assets, typically ranging from 0.25% to 1.20% per year. For individual oil stocks, research involves analyzing company fundamentals, financial performance, and industry segment exposure.

Placing buy and sell orders for ETPs and stocks through a brokerage platform is common. Market orders are used for immediate execution at the prevailing market price. Limit orders provide price control, allowing investors to specify maximum buy or minimum sell prices. Stop orders and stop-limit orders manage risk, automatically triggering a trade if a price threshold is crossed, aiming to limit losses or protect gains.

Key Drivers of Oil Price Movements

Oil prices are influenced by global factors, making their movements dynamic and unpredictable. On the supply side, major oil-producing entities’ decisions impact global availability. OPEC+ frequently adjusts production quotas to stabilize or influence prices. Output from non-OPEC countries, like US shale production, also plays a role, as does geopolitical stability in major oil-producing regions. Disruptions from conflicts or natural disasters can rapidly reduce supply, leading to price spikes.

Demand factors also shape oil prices. Global economic growth is a primary driver, with increased industrial activity and transportation needs leading to higher consumption. Conversely, economic slowdowns result in reduced demand and downward pressure on prices. Seasonal variations also affect consumption, with heating oil demand rising in winter and gasoline demand increasing during summer travel.

Geopolitical events extend beyond supply disruptions and can introduce volatility. Political instability, sanctions, or major policy shifts in key oil-producing or consuming nations create uncertainty and impact market sentiment, leading to rapid price adjustments. News and speculation about future events, like technological advancements in alternative energy or changes in global trade, also influence price expectations.

Currency fluctuations, particularly the US dollar’s strength, also affect oil prices. Since oil is primarily traded in US dollars, a stronger dollar makes oil more expensive for other currencies, potentially dampening demand and lowering prices. Conversely, a weaker dollar can make oil cheaper for international buyers, potentially increasing demand and pushing prices higher. This inverse relationship can shift due to evolving market dynamics and the US’s changing role in the global oil market.