How to invest in oil with little money
The crude oil markets have been highly volatile in 2022, with many investors keeping their eyes on the steep price upswings seen over the past 12 months. Russia’s invasion of Ukraine prompted massive price spikes, disrupting trade flows and sending global energy markets reeling.
Are you looking to understand how to invest in oil with a small portfolio? In this article we explain the different instruments you can use to trade the oil market to help you choose the option that best suits your goals.
Brent crude oil live price chart
How to invest in oil with little money
There are three main types of financial assets you can use for oil investing: futures and options; contracts for difference (CFDs); and oil stocks and exchange-traded funds (ETFs).
Futures and options
Crude oil futures are contracts under which the buyer agrees to pay a set price to the seller for delivery of a certain amount of oil on a specified date. Some futures require the buyer to take physical delivery, while others are cash settled. Each futures contract represents 1,000 barrels of oil.
Crude oil options contracts give buyers the right to buy or sell oil at a specified price based on the futures market, but do not require physical delivery of the underlying asset. Options buyers pay for the option, rather than the underlying futures contract. This means they require less upfront capital to take a position.
How to invest in oil futures and options? There are many different types of crude oil that trade on the commodities markets, but the major markets for investors are Brent crude oil, which is the global benchmark, and West Texas Intermediate (WTI) crude oil, which is the benchmark for North America.
Options for crude oil are the most actively traded energy derivatives on the New York Mercantile Exchange (NYMEX). While both types of oil trade on the NYMEX and the Intercontinental Exchange (ICE), WTI options are primarily traded on the NYMEX and Brent options on ICE.
Futures contracts expire on the third business day before the 25th day of the month ahead of the delivery month. If the 25th calendar day is not a business day, contracts expire on the third business day before the business day that precedes the 25th calendar day.
Contracts for difference (CFDs)
For investors looking to invest in oil with little money, contracts for difference (CFDs) offer an alternative way to speculate on the price of crude oil. CFDs are contracts between a buyer and a broker to exchange the difference in the value of a futures contract between the price when a contract is opened and the price when it is closed.
Like options, CFDs enable traders to buy or sell, so they can open a long position if they expect the oil price to rise or go short if they expect it to fall.
CFDs allow traders to open fractional positions for less than 1,000 barrels of oil, so that they can invest smaller amounts of money. For example, a US Crude Oil CFD order can be for 25 barrels.
CFDs also allow traders to use leverage to multiply the size of their positions. Leverage requires investment for a fraction of the trade’s value. This means that investors can increase their market exposure and potentially maximise profits from the initial investment. However, margin trading could also magnify losses, which makes it very risky.
For example, the 10% margin means that you have to deposit only 10% of the value of the trade you want to open, and the rest is covered by your CFD provider. If you want to place a trade for $1,000-worth of crude oil CFDs and your broker requires 10% margin, you need only $100 as initial capital to open the trade.
CFD providers like Capital.com offer commission-free trades, reducing the cost of oil investment. Investors also save money on storage costs as they do not need to take physical ownership of the oil.
US crude oil price live chart
Oil stocks and ETFs
If you’re interested in how to invest in oil, you can gain exposure to the oil market by trading stocks in companies involved in the industry, or exchange-traded funds (ETFs) that trade futures or company stocks.
What are the top oil stocks that beginner investors might consider? Let’s look at the top five oil and gas companies by market capitalisation (as of 5 September 2022).
Saudi Aramco
One of the world’s largest companies based on revenue, this Saudi Arabian oil and gas company (2222) briefly overtook US technology firm Apple (AAPL) as the world’s most valuable company in May 2022.
Saudi Aramco’s stock has gained 17.52% year-to-date (YTD), and had a market capitalisation of $2.195trn at the time of writing on 5 September 2022.
Analysts expect Saudi Aramco’s revenues and profits to slide over the next few years from 2022’s spike, according to data from Business Insider. The company’s income has climbed as crude oil prices have jumped to their highest level since its 2008 peak.
Exxon Mobil
US-based Exxon Mobil (XOM) has seen its share price climb by 50.44% year-to-date, having hit an all-time high of $105.57 a share in early June.
Publishing its second-quarter 2022 results, the company said: “Exxon Mobil Corporation announced estimated second-quarter 2022 earnings of $17.9 billion, or $4.21 per share assuming dilution. Second-quarter results included a favorable identified item of nearly $300 million associated with the sale of the Barnett Shale Upstream assets. Capital and exploration expenditures were $4.6 billion in the second quarter and $9.5 billion for the first half of 2022”.
Exxon Mobil (XOM) live price chart
Chevron
Shares in US-based Chevron (CVX) have gained 32.36% year-to-date, with the stock reaching an all-time high of $182.40 in early June.
Analysts expect the company’s earnings to increase because of the rise in oil prices, but analysts at Goldman Sachs noted recently that Chevron has a “less compelling” project queue than Exxon Mobil. Goldman Sachs lowered its price target on the stock from $181 to $162 as of 5 September 2022.
Shell
Royal Dutch Shell (SHEL), which decided in late 2021 to move its headquarters from the Netherlands to the UK, has seen a 38.32% rise in its share price year-to-date to £23.48.
The average analyst price target was £28.31, according to data compiled by MarketBeat. Henri Patricot at UBS Group set a price target of £26.50 on the stock. JPMorgan’s analysis bolstered its target price for SHEL from £28.50 to £30.
ConocoPhillips
ConocoPhillips (COC) is an American multinational corporation engaged in hydrocarbon exploration and production. The company recently overtook PetroChina (PTR) as the fifth-largest oil and gas company by market cap. The stock has risen 42.77% YTD.
A review comprised of 24 analysts offering 12-month price forecasts for Conocophillips by CNN has a median target of $123.00, with a high estimate of $153.00 and a low estimate of $106.00.
If you are focused on how to invest in oil with little money, research oil company stocks and ETFs to fund those with prices that are compatible with your investing budget.
How do analysts view crude oil markets in light of the recent heightened price volatility? Following the latest oil market analysis will help inform your decisions on how to invest in oil for your portfolio.
Oil market outlook: Analysts’ views
Commodity analysts at Fitch Solutions forecast the Brent crude oil price to average $105 in 2022, falling to $100 in 2023.
Price targets for WTI crude were set at $102 for the second half of 2022 and $98 in 2023.
“Despite large-scale strategic storage releases and demand-side weakness in China, the market has remained extremely tight, as reflected in strong physical price differentials. Production increases among US shale producers, OPEC+ members and potentially Iran will help boost supply, but the upside is limited, while expected further export declines in Russia, the winding down of strategic storage releases and continued strong demand growth should support prices against elevated macro risks,” they added.
According to the latest oil forecast from the US Energy Information Administration (EIA), the Brent spot price could average $104.78 in the second half of 2022 and slide down to $95.13 in 2023, while the WTI price could average $98.71 in 2022 and $89.13 in 2023.
Once you have chosen the best way to trade US Crude or Brent Crude oil to suit your objectives, make sure you conduct a thorough oil market analysis to make informed trading decisions. Note that analysts’ views and price targets can be wrong. Never trade more than you can afford to lose.
FAQs
Is investing in oil a good idea?
Commodities markets including crude oil (US Crude or Brent Crude) are highly volatile, offering the potential for large gains but also presenting high risks to investors. Whether oil is a good fit for your investment portfolio will depend on your personal strategy and risk tolerance.
Are oil stocks a good buy?
Oil stocks have benefited from elevated oil prices lately, but the performance of individual stocks could vary depending on company fundamentals. You should do your own research to decide which stocks could fit your portfolio.
Should I invest in oil right now?
Whether you choose to invest in oil is a personal decision that you should make based on research into how the oil market is performing and the outlook for your preferred investing time horizon.
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