How to Invest in Oil UK – Beginner’s Guide
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Did you know that crude oil prices have rallied up nearly 500% higher since the coronavirus pandemic?
This once in a lifetime level of volatility in the oil market has also attracted institutional mutual funds who have helped lift the whole energy sector causing oil stocks and oil ETFs to rally higher as well.
If you’re looking to get in on this market action, this How to Invest in Oil UK – Beginner’s Guide will most certainly help!
In a step by step process, we cover how to invest in crude oil with the best brokers, the best strategies to navigate oil market volatility, the best oil companies to invest in and much, much more.
How to Invest in Oil UK Quick Tutorial
If you’re wondering how to invest in oil UK with little money then follow these quickfire steps:
1. Choose an oil broker.
2. Open an account.
3. Deposit funds. The first time minimum deposit is just $200 (£142) which you can do through bank wire transfer, debit/credit card or via e-wallets.
4. Invest in oil! You’re now ready to invest in oil. Find your market and hit trade!
Job done! You’ve just invested in oil using the world’s biggest social trading platform that has more than 17 million users.
Step 1: Choose an Oil Investment Platform
One of the most important parts to consider when investing in oil is to make sure you are using the right trading platform.
After all, your platform is your gateway to investing in the oil market so it needs to be safe, secure and user-friendly.
Below, we discuss some of the best oil investment platform providers for you to choose from.
Step 2: Research Oil Investment
Now you know more about the variety of ways you can start oil trading it is also wise to know as much about the oil market as possible. This is important in finding out where the opportunities are but also what the risks are.
Be sure to explore the sections below to build your knowledge on all things related to oil investing!
Different Types of Oil
When learning how to invest in crude oil, it’s important to know the different types oil blends there are. The two most commonly traded are WTI crude oil and Brent crude oil.
WTI (West Texas Intermediate) crude oil is an oil blend that is processed in the United States and is traded on the New York Mercantile Exchange (NYMEX). This type of oil is extracted from Texas, Louisiana and North Dakota oil fields and then pipelined to Oklahoma.
Brent crude oil is extracted from the North Sea and pipelined to Scotland. It’s traded on the Intercontinental Exchange (ICE) and is used as a benchmark for oil prices in Europe, Africa and the Middle East.
Price of Oil
The price of oil blends such as WTI and Brent are in US dollars. When looking at the price of oil, you are essentially looking at the price of one barrel of oil in US dollars. For example, at the time of writing the price of WTI crude oil is $63.10 per barrel.
When learning how to invest in crude oil, being able to determine future price fluctuations will come in handy. The price of oil is affected by many different factors, such as:
- OPEC production. The Organization of the Petroleum Exporting Countries (OPEC) consists of 14 oil-rich nations led by Saudi Arabia. They meet every month to discuss how much oil they will produce and sell in the open market. If they cut supply, prices typically rise and vice versa.
- Geopolitics. The oil market is highly politicised due to tensions that can flare-up in the Middle East. Even the coronavirus pandemic caused issues in the price of oil, as barrels of oil were sitting in mainland US during lockdowns causing a stockpile and a crash in the oil price.
- The US Dollar. As WTI and Brent crude oil are priced in US dollars, any large movements in the currency can have an impact on the price per barrel.
Is Oil a Good Investment? Oil Investment Analysis
Since the near 90% crash in oil prices during the coronavirus pandemic and subsequent 500% rally back up, many investors are questioning if oil is now a good investment.
According to analysts at JP Morgan, commodities have started a new supercycle, as prices soar in agriculture, metals and energy. Only four supercycles have developed in the past 100 years, with the last one peaking in 2008.
Many analysts are now calling for higher prices in oil over the long-term, citing a variety of reasons, including an increase in oil demand due to:
- A successful coronavirus vaccine rollout that will increase international travel and mobility.
- Central bank stimulus, which is likely to increase infrastructure spending and manufacturing.
- Energy companies that are moving towards renewable energies, meaning less oil will be drilled overall, elevating the price of the current supply.
If oil prices can get anywhere close to the highs achieved in 2018 of ~$77, it would mark a 60% increase in the price of oil from where it opened at the beginning of 2021. A move towards the previous highs of 2018 of ~$113, would mark a 130% increase in prices.
Oil does have a fair amount of volatility as it is affected by global demand and geopolitical factors so it’s important to know some of the risks of oil investment too.
Risks of Oil Investment
When thinking of how to invest in oil UK, it’s important to also think about the risks involved, as the oil market as a high degree of volatility. Some risks include:
- Economic risk. Oil markets can be affected by shocks in supply or demand which can come about from weather patterns, geopolitical tensions and black swan events. For example, when oil demand stopped abruptly during the pandemic, oil prices crashed to 30-year lows.
- Company risk. If you are choosing oil companies to invest in, then there are company news announcements that could hurt the stock price. A scandal, accounting mismanagement or negative earnings results can cause some investors to bail.
- Political risks. Geopolitical tensions can cause wild fluctuations in oil prices. A lot of oil comes from the Middle East where tensions can easily flare up between different countries causing disruptions to supply routes.
- Climate change risks. More and more oil companies are trying to move away from drilling beneath the earth to find more climate-friendly sources of energy. Many companies are also losing big investors as mutual funds move away from energy companies that leave a large carbon footprint.
Oil Investment Strategies
There are a variety of strategies investors can use to capitalise on the volatility of the oil market. Many of the strategies will depend on your chosen style of investing, such as if you prefer short-term or long-term investing. Let’s have a look at a few:
Oil investing using fundamentals
Longer-term investors tend to analyse the fundamental picture of what could happen over many months or years. These type of investors are more likely to focus on oil companies to invest in, rather than buying oil directly.
As energy sector companies tend to pay out high dividends, it’s a great strategy that combines different revenue streams – the appreciation in the share price and the dividend income paid out quarterly.
Oil trading using technical analysis
Shorter-term investors, such as those day trading may choose to speculate on the price direction of the oil market using CFDs, as they provide the opportunity to profit from rising and falling markets using leverage.
In this instance, most traders would study price charts and technical analysis indicators to help identify short-term turning points in the market. While it is a highly specialised skill, day trading oil is popular due to the volatility of the market.
How to Invest in Oil UK – Conclusion
In this How to Invest in Oil UK – Beginner’s Guide we’ve gone through some of the best platforms to invest in oil, the different types of products available to invest in and how to do so.
Whether you are trading oil directly via CFDs, oil stocks or oil ETFs, many analysts are very optimistic about the future of the oil market. In fact, JP Morgan believes we are now in a commodity trading supercycle – only the fifth one in the past 100 years.
To be able to capitalise on this trend, having access to the right oil broker and platform is essential.
FAQs
Is oil a good investment?
Many analysts are now forecasting the commodity market, including oil, is entering a new supercycle. This is due to growth expected from a return back to international travel and central bank stimulus that is fuelling infrastructure and manufacturing.
How do I decide which oil companies to invest in?
An indirect play on the oil market is to invest in oil stocks such as Exxon Mobil, Chevron, BP and Shell.
How to invest in oil with little money?
The best place to start investing in oil is with a small amount of money. Once you build your confidence and experience then you can start to go a bit bigger. Some brokers allow you to open accounts with a low minimum deposit so you can get started the right way.
What are the risks in learning how to invest in crude oil?
There is no risk in learning how to invest in crude oil but there is a risk in not learning! Education is key when comes to trading the oil market. Make sure you read this beginner’s guide thoroughly and use your broker’s education resource section too.
Can you profit from a fall in oil prices?
With CFDs, you can trade long and short which means you can profit from both rising and falling prices.