How to Invest in Oil ( How to buy oil futures )

Investors have many options for getting involved with oil. These methods come with varying degrees of risk and range from direct investment in oil as a commodity, to indirect exposure in oil through the ownership of energy-related equities. Each of these investment types can be acquired through an online brokerage account.

Futures prices for light sweet crude oil, which is commonly known as West Texas Intermediate, plunged approximately 40% Monday to around $11 a barrel, a 20-year low. Benchmark crude-oil prices are cratering —sort of. And the steep declines in near-term crude contracts continue to pummel energy stocks. Several “oily industrial ” stocks—industrial companies that generate a lot of sales selling to the energy sector—are getting hammered. The decline in oil prices, however, can be used as an opportunity to pick up high-quality industrial stocks at a discount.

Oil as an Asset

Oil is an economically and strategically crucial resource for many nations due to its basis for much of the energy that we consume. Countries like the United States maintain large reserves of crude oil for future use. The measure of these oil reserves acts as an indicator for investors; changes in the stock levels of oil are reflections of trends in production and consumption.

Oil and gas investors look for specific economic indicators to help them understand future movements in the petroleum industry. Like any commodity market, oil and gas companies, and petroleum futures are sensitive to inventory levels, production, global demand, interest rate policies, and aggregate economic figures such as gross domestic product.

Aside from supply and demand factors, another force driving oil prices has been investors and speculators bidding on oil futures contracts. Many major institutional investors now involved in the oil markets, such as pension and endowment funds, hold commodity-linked investments as part of a long-term asset-allocation strategy. Others, including Wall Street speculators, trade oil futures for very short periods of time to reap quick profits. Some observers attribute wide short-term swings in oil prices to these speculators, while others believe their influence is minimal.

Investing in Oil Directly
One direct method of owning oil is through the purchase of oil futures or oil options. Futures are highly volatile and involve a high degree of risk. Additionally, investing in futures may require the investor to do a lot of homework as well as invest a large amount of capital.

Another direct method of owning oil is through the purchase of commodity-based oil exchange-traded funds (ETFs). ETFs trade on a stock exchange and can be purchased and sold in a manner similar to stocks. For example, buying one share of the U.S. Oil Fund (USO) would give you exposure to roughly one barrel of oil. The fund's investment objective is to provide daily investment results corresponding to the daily percentage changes of the spot price of West Texas Intermediate (WTI) crude oil to be delivered to Cushing, Oklahoma.

Investing in Oil Indirectly

In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs, like the iShares Global Energy Sector Index Fund (IXC), and to energy-sector mutual funds, like the the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk.

Other ETFS that track the oil and gas drilling sector are the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), and the Invesco Dynamic Energy Exploration & Production Portfolio (PXE).