Introduction to Trade the Oil Price
A big topic of discussion recently has been the oil price. The price has quickly fallen from about $110 USD per barrel. But how do to relate to the current oil price?
The oil price decrease depends on a variety of factors. A sharply rising dollar along with an economic downturn in Europe and China have contributed. USA has also taken a clear stance towards becoming independent of oil imports, which has led to a lot of investment to increase domestic energy production, including shale gas. At the November meeting, OPEC (Organization of Petroleum Exporting Countries), also decided not to defend oil prices and lower production in order not to lose market share, which further fueled the price collapse.
There are many different opinions on where the price of oil is going and of course it is very difficult to predict a bottom. Goldman Sachs has lowered its forecasts for oil prices and predicts prices for Brent oil at 3, 6 and 12 months for $42, $43 and $70 dollars per barrel.
RT's segments Crosstalk recently brought up in oil prices, which discusses how low oil can go:
Whether you believe that oil prices will continue to fall or turn back up, there are ways for you to invest.
Stocks for Trading on the Crude Oil Price
If you believe in a rise in oil prices, a direct investment in the oil company is perhaps the most obvious opportunity to expose your portfolio against the oil. Below you can take a look at some of the largest US-listed oil companies in terms of market value. Note that there is also a bunch of listed companies as subcontractors for these. However, it is important to read up on any company before investing. There are many parameters that allow an oil company to increase or decrease in value, not just the price of oil.
- Exxon Mobil
- Royal Dutch Shell
Mutual Funds for Investing in the Crude Oil Price
Mutual funds that invest in the energy sector are usually heavily exposed to the major oil companies and hence the price of oil. Below is a list of some mutual funds exposed to oil. Many of the companies that the funds invest in are traded in USD and therefore, the past year's rise in the dollar offsets the decline in a number of funds.
- Franklin Natural Resources
- UBS ES Energy
- Candriam Eqs L Global Energy
- Parvest Equity World Energy
- Schroder ISF Global Energy
- BGF World Energy A2
- ODIN Offshore NOK
Mini Futures is an exchange-traded product that makes it possible to invest with leverage in both bull and bear market directly in the price of the underlying asset. In this case, we're after the price of oil (specifically, Brent oil). For those of you who believe in rising oil prices Mini Long is what you want and those of you who believe in the continued decline in oil prices, Mini Short. The Mini Futures are leverage variable, which allows it to change when the price of the underlying asset changes. The closer the barrier level price is, the higher the leverage. If the underlying reaches the barrier level, it's game over - you've lost your money.
Higher leverage means higher risk. If you are investing $10,000 USD in a Mini Futures leveraged at X10, you take a position corresponding to $100,000 USD.
You can also invest in so-called certificates. These are also usually traded with leverage. However, there is a very important difference in how leverage works. In a Mini Future, leverage is variable and corrected as the price changes, making the Mini Future more suitable for long-term investment. In a certificate the leverage is fixed. If you own an X5 leverage bull certificate for 1 year and underlying price has gone up 10%, then maybe, one expects that one's possession should have gone up 50%. This does not hold true, but is only true for the current day. The volatility of the underlying asset causes the certificate to lose value over time and should therefore not be seen as a long-term investment, but is better suited for short positions or day traders.
Higher leverage means higher risk. If you are investing $10,000 USD in a certificate with X5 leverage, that corresponds to a position of $50,000.
All investments are subject to risk. Below are some examples of the risks you need to know if you want to trade with Mini Futures & Certificates.
Market risk means that if the underlying asset moves the "wrong direction", your investment quickly loses value and even become worthless. The higher the leverage the higher the risk.
Currency risk exists in the certificate where the underlying asset is traded in another foreign currency value of the products affected by currency fluctuations between the USD and the foreign currency.
Counterparty risk is about the credit risk of the issuer. Mini Futures & certificates issued by an issuer. Therefore, the purchase of these products always comes with a credit risk of the issuer. If the issuer goes bankrupt, your invested capital may be lost.
Liquidity risk, under normal market conditions makes issuer bid/ask prices are ongoing in relation to the underlying moves. However, there may be some times when it may be difficult to trade in the products. This can happen, for example, of the lack of liquidity in the market.
Do Your Homework
I am in no position a financial adviser and cannot be held accountable if you trade on anything said in this article.
I recommend that you read more on the topic of investing to really get an understanding on how it all works.
The Intelligent Investor
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