This is why you need to consider having crude oil in your investment portfolio
The Covid-19 pandemic of 2020 has dramatically changed how people live, work and travel. In particular, the virus decimated international air travel and caused crude oil prices to collapse in April.
On April 20, US crude oil prices went into negative territory for the first time in history. Oil producers were paying buyers US$38 barrel to take the oil that they could no longer store. International Brent crude oil prices fell in a similar fashion to under US$20 per barrel. Both crude oil benchmarks have since recovered, but analysts expect oil supply will remain subdued and oil prices to remain below the levels seen at the beginning of the year.
Despite the dramatic episode, crude oil remains an important investment asset in many diversified investment portfolios, both for institutional and retail investors. If you have yet to put commodities like crude oil in your portfolio, now is the right time to figure out if it needs to be there.
What is Crude oil?
Crude oil is the raw material that is extracted from the earth and turned into energy products – like diesel fuel, jet fuel, petroleum, gasoline – that power most of modern technology. It is also used to produce petrochemicals which in turn produces other by products like plastics, solvents, and fertilizers.
It is traded globally through spot contracts and, more commonly, futures contracts. An oil futures contract is an agreement between two parties to sell and purchase a number of barrels of crude oil at a pre-fixed price on a pre-determined future date.
There are two main benchmarks for oil futures. West Texas Intermediate (WTI) light sweet crude is the main benchmark for oil produced in North America, and is traded on the New York Mercantile Exchange (NYMEX). The other main benchmark is Brent crude, which is traded on the Intercontinental Exchange (ICE), and originates from the oil fields in the North Sea.
While both types of oil are considered light and sweet, and superior for refining into gasoline, there are some key differences.
Since Brent crude is produced near the sea, its transportation costs are lower. On the other hand, WTI crude oil is produced in landlocked areas, which makes transportation more costly. At the same time, international geopolitical turmoil is more likely to impact Brent crude, while WTI is more susceptible to US economic developments.
Reasons to trade crude oil
Crude oil prices are predominantly determined by its own set of demand and supply factors, as well as overall market sentiment. This means oil futures are largely uncorrelated with stock market movements, or changes in the US dollar. That alone makes it an attractive choice for portfolio diversification, especially when investors’ portfolios are heavily weighted on stocks and stock related products.
The oil futures market is also very liquid, as they are the most actively traded contracts with high daily trading volumes. The NYMEX WTI, in particular, is the most liquid crude oil benchmark globally.
When trading oil futures, investors can choose to trade both long and short positions so they can participate in both bull and bear markets, and volatile markets. They can even consider trading options.
Planning to trade futures? Then you need to know about this US$1.50 commission promotion.
Oil futures are also traded with leverage, which is suitable for experienced traders who want to minimise their initial capital outlay. It is also important to note that its leverage nature means it carries inherent risks common to all leveraged products, in that losses can exceed the initial investment amount.
Should investors trade oil futures now?
To be sure, the Covid-19 pandemic and the measures taken worldwide to prevent its spread have taken its toll on the energy market. Besides the collapse in April, the pandemic continues to slash demand for transportation fuels across the board, with borders remaining tightly shut, and travel of any kind is considered almost taboo. On the supply side, major oil producers in OPEC+ have been maintaining their low production levels, while smaller producers are expected to cut production further in light of lower prices. Oil exploration activities are also expected to taking a hit.
|Product||Day||Settle||Change||%||Low||High||Range||Intra Day (%)||Intra Day ($/lot)|
|Crude||WTI (CLX0)||29-Sep-20||39.29||$/bbl||-1.31||-3.3%||38.41||40.70||2.29||5.6%||$ 2,290|
While oil prices appear to be moving sideways, intra-day volatility remains high, particularly on the back of geopolitical tensions in Libya, Azerbaijan, and the Middle East, hurricanes in the US Gulf Coast, and potential changes in US energy policies after the Presidential elections in November.
Both historical and implied volatility are in the high 40% level, which is above 2019 levels, but below the levels seen in 1Q2020.
The NYMEX WTI futures liquidity has also remained strong, with the bid/ask spread continuing to be extremely tight, including during non-US trading hours.
These signs point to a robust trading environment, with opportunities for crude oil investors to trade amid the volatility. Even natural gas could be an attractive asset to trade, despite its cyclical nature.
US$1.50 promotion to trade Micro E-mini futures contracts
If you are looking for other liquid futures contracts to invest in, you can also consider trading Micro E-mini futures contracts. Sized at one-tenth of a classic E-mini contract, the Micro contracts allow you to trade the futures market with less cash and lower margins.
From now till the end of 2020, investors can trade five CME Micro E-mini futures contracts for just US$1.50 in commissions per side per lot. You will find more details here.
To enjoy this promotion, you will first need to be a Phillip Futures customer. Sign up for your trading account online now, receive your approval within a couple of working days and sign up for the promotion here to get started.