The oil market can be confusing for both professional and individual investors, as large price fluctuations sometimes occur daily.

In this article, we review the main factors that drive the oil market and how to get a financial share of oil assets in your investment portfolio.

 

Demand generation

Oil is a global commodity. The U.S. Energy Information Administration (EIA) estimates global oil demand at more than 98 million barrels per day in 2023, a record high.

When the price of oil rises, there is a downward trend in demand in developed countries, while from emerging market developing countries it will increase as these countries industrialization regardless of oil prices.

 

Deliveries

On the supply side, about 101 million barrels of oil will be produced every day in 2023, another new record, but overall oil exploration tends to slow.

For example, the discovery of new reserves in 2017 was the lowest since the 1940s, and the volume of inventories discovered has fallen every year since 2014 as oil exploration budgets were cut following the fall in oil prices in the 2010s.

Most OPEC countries do not have the capacity to produce much more oil. Saudi Arabia, the only exception, retains spare capacity of 1.5 to 2 million barrels of oil per day.

 

Investment options in the oil market

Regardless of the underlying causes of oil price changes, traders who want to invest in oil markets and benefit from fluctuations in energy prices have a range of options. The bulk of oil trading takes place in derivatives markets using futures and options contracts. They may not be available to many individual investors, but there are several other ways to add oil to your portfolio.

One of the easiest ways for the average person to invest in oil is stocks of oil and service companies. In addition, investors can gain an indirect impact on oil by purchasing energy sector ETFs. Several industry mutual funds are available that invest primarily in energy-related stocks, such as the iShares Global Energy Sector Index Fund (IXC), and energy sector mutual funds, such as the T. Rowe Price New Era Fund (PRNEX). These energy-focused ETFs and mutual funds invest exclusively in oil and oilfield services stocks and have less risk.

Investors can gain more direct access to oil prices through an exchange-traded fund (ETF) or exchange-traded bonds (ETN), which typically invest in oil futures contracts rather than energy stocks. Because oil prices largely do not correlate with stock market returns or the direction of the U.S. dollar, these products follow oil prices more closely than energy stocks and can serve as a hedge and portfolio diversification tool.

 

Oil as an asset

Oil is an economically important resource, providing most of the energy for transportation as well as raw materials for production. It’s the best-selling product in the world. Because crude oil is so important and the process of producing it is long, consumers and suppliers are notoriously slow to adjust consumption and production as prices rise or fall. That means oil prices need to move on to balance markets after disruptions such as falling demand caused by a pandemic or supply disruptions caused by war or economic sanctions.

Oil prices are set worldwide in a variety of spot and futures markets for crude oil, as well as related products, by market participants including producers, consumers, short-term speculators and long-term investors.

While energy prices tend to be volatile, the markets setting them are highly liquid and market participants tend to be well informed. Traders without extensive experience should proceed with caution.

 

How to use oil in trading?

To trade futures through an online brokerage account, you need to earn margin and pass a broker suitability check, which isn’t a particularly difficult task these days.

Usually, this process requires completing an online application and waiting for a few days. Some brokerages require a minimum account amount to allow futures trading, while others do not. Tariffs and commissions will also vary.

Alternatively, you can trade futures with a full-service broker.

 

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