Crude oil is a strategic energy resource that plays a huge role in the world. It is called black gold because of its uniqueness – after its refining, it is possible to obtain not only fuels, but also a number of other intermediates – m.in. medicines. A wide range of use cases and different types of contracts make it worth following the quotations and looking for investment opportunities on the oil market.
Black gold – types of crude oil
There are several types of this raw material on the market. The most popular are four types of oil. These are:
- Brent oil – is extracted from the North Sea area. It belongs to the “sweet” species due to its low sulfur content.
- WTI oil – comes mainly from the United States from the Appalachian and Louisiana regions. It is also “sweet” and light oil.
- Urals (REBCO) – oil extraction in this case takes place in Western Siberia and in the vicinity of the Ural Mountains. It can be classified as “sour”.
- OPEC Benchmark Reference Basket – is a basket consisting of many types of oil extracted and sold by the OPEC cartel countries.
Investing in oil – a wide range of opportunities
Commodities such as oil are traded through standardised futures contracts on global exchanges. The commodity market is divided into two groups of participants: the first group consists of entities trading contracts in order to hedge commodity prices (hedging). The second group are speculators who make money on the difference in oil prices.
Relatively young instruments are contracts for difference (CFDs). Investing in oil in this way is currently available in many financial institutions, including TMS Brokers. Traders are eager to choose this instrument due to the fact that it requires less capital involvement than, for example, futures contracts. Below is a brief crude oil characteristics:
Types of futures contracts
- Contract for difference (CFD)
A CFD is a derivative instrument. It precisely means a contract for difference. It is available on the OTC (Over the Counter) market, i.e. on the over-the-counter market. This instrument is leveraged, which means that you do not need to have as much money as in the case of futures investments. There are two types of CFDs available at TMS based on the price of oil:
CFD based on the price of a Brent oil futures contract listed on the Intercontinental Exchange Futures Europe (ICE Futures Europe)
- CFD based on WTI oil futures from the NYMEX exchange.
The nominal value of 1 contract (1 lot) is in both cases the current price of a barrel multiplied by 1000 USD. The advantage of this instrument is that investing in oil is possible here when opening a position of less than 1 lot. Decimals and hundredths of the contract are available, which opens the way for investors with a smaller portfolio. Investments on CFDs are similar to those on the forex market. Oil can be bought by us (long position) or sold (short position) – so we can invest during the bull and bear market.
- Futures Contract
The WTI Light Seet Crude Futures Contract is traded on the NYMEX (New York Mercantile Exchange) CME. This instrument is strictly standardized because it is traded on the stock exchange. One contract is worth 1000 barrels. The instrument on the stock exchange has a CL ticker. The minimum change in the value is $0.01, which means that on the smallest tick, with one contract, the profit or loss will be $10. To open 1 contract, the required initial margin is approx. $4710. Unfortunately, futures contracts are not divisible, which is why we cannot buy or sell less than one contract. This instrument is available on one of the trading platforms at the TMS Brokers Brokerage House (TMS Direct platform).
- ETFs based on the price of oil
An ETF (Exchange Traded Funds) is an investment fund that aims to reflect the behavior of a specific benchmark. Such a benchmark may be the price of crude oil. The fund issues ETF units (participation titles, which are securities) on the basis of financial instruments purchased for the portfolio. Shares are listed on the stock exchange. The advantage of this type of instruments is very low fees, as these instruments are passively managed.
Black gold price – what does it depend on
Fluctuations in the exchange rate of the American currency have a direct impact on the valuation of black gold, and thus on investing in oil. This is because the US currency is the unit of account in the global black gold trade. The dollar’s appreciation will cause a decline in oil prices, and the weakening of the USD will translate into bulls dominating the market for this energy commodity.
Like any commodity market, the oil market is also dependent on the demand-supply relationship. It is the supply (i.e. production) of oil and demand (consumption) that strongly determine oil prices on the stock exchange. Global economic growth will create demand for black gold. A recession, on the other hand, will do the opposite.
Whether oil will become more expensive in the short term will depend, m.in on the decisions of the OPEC cartel, investor sentiment, geopolitical events or data on oil inventories (published by the DoE or API).
The price of a barrel of oil is an important issue for all countries that use this raw material in their industry. More expensive oil means a higher cost of producing goods and services, which in turn translates into a decrease in profit margins and a decrease in effective demand.
Crude oil characteristics
What is crude oil used for? Although we most often associate it with oil at petrol stations, it has a wide range of applications. It is the basic raw material of the petrochemical industry used to obtain, m.in, gasoline, kerosene, oils, paraffin, lubricants, bitumen, mazut, petroleum jelly and many synthetic materials. Oil is also used in the production of medicines, plastics, tires, computers, and preservatives for clothing. So products made of crude oil at home are the norm, because the petrochemical industry is not the only use of semi-finished products from crude oil processing.