Everything you need to grasp about investing in crude oil
As investors continue to seek out varied financial products to diversify their portfolio to leverage and manage risk, commodity trading has been gaining increasing traction due to its demand and versatility. Commodities can be categorized into two categories; hard commodities are commodities being mined with examples of these being silver and copper and soft commodities that include coffee, cocoa and sugar. Investors have the ability to access about 50 major commodity markets worldwide via financial transactions without the need of having to hold physical trade of these commodities.
A vital commodity that is most used is crude oil which is refined into petroleum products to extract maximum value. More widely used than just for fuelling cars, crude oil is present in a number of products including plastics based products such as cellphone covers, bottles and thousands of other items. Crude oil plays such an important role that it is positively correlated to food prices, as it is a major component in fertilizer and storage plastics of food items. If oil prices increase, there is a domino effect all along the production chain thus making it positively correlated to costlier food production.
Crude oil is traded on several major commodity exchanges including New York Mercantile Exchange (NYMEX) Intercontinental Exchange (ICE), Dubai Mercantile Exchange (DME), Multi Commodity Exchange, (MCX), India’s National Commodity and Derivatives Exchange (NCDEX) and the Tokyo Commodity Exchange (TOCOM).
There are several ways to consider starting an investment in commodities. One is to purchase varying amounts of physical raw commodities that would require taking positions that not only incurs high financing, storage and insurance cost, but also usually involves unrequired risks for retail investors. A safer option for investors would be through the use of a futures account and trade via a brokerage house for specific commodities.
Exchange Traded Funds (ETF) and index mutual funds track the performance of a specified index. ETF however, have no minimum investment and allows multiple transactions. Commodity ETFs track indexes reflecting futures prices however, ETF shares trades at a specified margin of the barrel price instead of the actual price but moves in tandem with the percentage gains of the commodity.
Another way of getting involved in commodities trading is by investing in equities of companies that has exposure to commodities. Investors should be wary in that when investing in equities of companies with exposure to commodities, further consideration needs to be taken into account such as management, business model, diversification and balance sheet. These funds are collectively pooled together and invested by professional fund managers that amalgamate several financial products to achieve the fund’s financial objectives.
Crude Oil Historic Price Performance
Based on the historical prices of crude oil, in 2009, prices of crude oil surpassed the $140 per barrel yet dramatically plunged to less than $40 a barrel the year after. Currently, it hovers near the $50 a barrel and is projected to remain relatively level for the next three quarters by trading analysts. With a bleak outlook for crude oil prices, experts are shifting their attention to other non-oil commodities for trading opportunities.