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The Pros and Cons of Crude Oil Investing

Crude oil prices fluctuate daily and are subject to supply and demand shocks. Over the past several years, the world has experienced both. Crude oil prices dropped into negative territory as demand declined at the beginning of the Covid-19 pandemic. Subsequently, as demand returned, supply was unable to keep pace, pushing crude oil prices above $100 per barrel. Investing in crude oil prices as CFDs requires understanding the fundamentals, including supply and demand. You might also want to understand technical analysis, which can help you enter and exit the crude oil markets at the most reasonable times.

What is Crude Oil?

Crude oil is a product composed of carbon and organic materials. It is a type of fossil fuel drilled from the earth and refined into other products such as heating oil, gasoline, and jet fuel. Crude oil is one of the most critical energy sources used worldwide and is also used to develop petrochemicals. Crude oil was first developed in the 19th century, during the Industrial Revolution. Crude oil investing as CFDs has become an essential component of developing a critical driver of global energy growth.

Why is Crude Oil Important? 

Crude oil is arguably the most important commodity on earth. It is the energy source that allows people to travel across the globe. All airplanes use crude oil in the form of jet fuel, which is refined to a form that can be used in airplanes. Most of the crude oil consumed is used for transportation fuels, but there are also alternative uses, including industrial, residential, commercial, and electric power generation. For example, according to the U.S. Energy Information Administration, transportation fuels have been the most significant component of crude oil refining in the United States since 1949

How to Invest in Crude Oil Prices

Crude oil investment can come in many forms. Traders will often use financial instruments such as contracts for differences (CFDs), Exchange Trade Funds (ETFs), and futures contracts to benefit from the changes in crude oil prices. CFDs track the movements of an underlying instrument like spot crude oil prices, and they are a way to take advantage of the volatile movement in crude oil prices. ETFs will, at times, hold crude oil futures and track the movements of those instruments.. Many times crude oil futures contracts will provide investors with a delivery date years in the future. 

An alternative way to invest in crude oil is to invest in ETFs that track companies that have crude oil operations. For example, a basket of companies that produce crude oil or refine crude oil. There are crude oil midstream companies that move crude oil from one place to another. While this type of crude oil investing is not a direct investment in crude oil prices, it provides investors with an opportunity to invest in the price of a fund that has operations related to oil and oil production.

Advantages of Crude Oil Investing

There are several pros and cons to investing in crude oil prices. The movement of crude oil prices usually reflects whether there is strong global demand or a supply issue. Crude oil prices can fluctuate, making it essential for any crude oil CFD or ETF investor to follow a weekly report reflecting crude oil fundamentals. For example, the U.S. Department of Energy releases a report on U.S. crude oil inventories, supply, and demand every Wednesday. This report also describes imports that enter the United States and the refinery inputs that tell you how much crude oil is refined into gasoline, heating oil, and jet fuel each week. 

Petroleum inventories, such as crude oil inventories and gasoline and distillate inventories (which include diesel fuel and heating oil), are the backbone of fundamental investment in crude oil. As inventories rise, the price will recede. As crude oil inventories fall, the upward pressure on prices will accelerate. 

The Cons of Crude Oil Investing

Crude oil prices will whipsaw based on several reasons. There might be a supply disruption or a demand collapse. There are also geopolitical risks that can impact prices. For example, when Russia invaded Ukraine, prices rose rapidly, as Russia is one of the world’s largest producers of crude oil. The volatility associated with crude oil can be difficult for many investors. While volatility can provide opportunity, it also presents an equal amount of risk, so crude oil CFD investors will need to be confident in their view regarding the volatility that can occur with crude oil prices. 

To gauge when to enter and exit a crude oil CFD investment, you might want to use technical analysis, which is the study of past price movements, as well as fundamental analysis, which provides a more current world view of where oil prices may be headed. 

The Bottom Line

Crude oil is one of the most widely used commodities worldwide. Crude oil is a fossil fuel drilled from the ground and refined into gasoline, heating oil, and jet fuel products. It is the most widely used energy source, and most of the crude oil refined is used for transportation fuels. 

There are several ways to invest in crude oil, including CFDs, ETFs, and crude oil futures. These products track the underlying movements of crude oil and provide you with direct access to crude oil price movements. You also might consider investing in the share prices of companies involved with crude oil operations. While not a direct investment in crude oil, equities provide you with multiple ways that a company can invest in the crude oil business.

There are several advantages to investing in crude oil. You can follow the fundamentals every week using a reputable report from the U.S. Department of Energy. You can also gauge the supply and demand issues through weekly inventories. The downside of trading crude oil prices is that it can be volatile. Geopolitical issues can impact prices, making it a tough product to trade over the short term.