You have the option to trade oil futures. Important things to consider before getting started.

Exploring Oil Futures as an Alternative Investment

For those seeking to diversify their investment portfolios with alternative assets, oil futures may be an appealing option. These contracts are known for their speculative nature, significant price swings, and the use of margin, which can increase both potential gains and losses—making them well-suited for investors with a higher risk tolerance.

Thinking about entering the oil futures market? Here’s a comprehensive overview to help you get started.

Understanding Oil Futures

Oil futures involve agreements to buy or sell a specified amount of oil—typically 1,000, 500, or 100 barrels—at a set price on a future date. These contracts are most commonly traded based on West Texas Intermediate crude oil, which is the U.S. benchmark, and Brent Crude, the global standard.

Getting Started with Oil Futures Investing

Not all brokerages provide access to futures trading, but platforms like Charles Schwab, Robinhood, Coinbase, E-Trade, Interactive Brokers, NinjaTrader, TradeStation, and Webull do offer this service.

To qualify for commodities trading, most brokers require:

• A minimum account balance as specified by the brokerage
• Approval for a margin account, allowing you to borrow funds from the broker
• Completion of an investor risk assessment form

Some investors use oil futures to offset risks in other energy-related holdings, such as stocks in oil, gas, or petroleum exploration companies.

Basic Strategies in Oil Futures Trading

• Buying a futures contract: Used when you anticipate oil prices will increase.
• Selling a futures contract: Chosen if you expect oil prices to decline.

Try Simulated Trading Before Committing Real Funds

Before risking actual capital, consider practicing with a trading simulator. These platforms let you test your strategies in real-time market conditions without financial risk, helping you build confidence and refine your approach.

As you become more comfortable with simulated trades, you’ll be better prepared to participate in the live oil futures market.

The Impact of Leverage in Oil Futures

Trading futures often involves leverage through margin accounts, allowing you to control a larger position with a smaller upfront investment. Typically, you’ll need to deposit between 2% and 12% of the contract’s value as margin. Maintaining this margin is crucial—if your balance falls below the required level, you’ll face a margin call and need to add funds.

Example of Leverage in Action

Consider this scenario from Charles Schwab:

• A trader expects oil prices to rise and purchases five Micro WTI Crude Oil contracts at $65 per barrel. The initial margin required is at least $2,550, giving them exposure to a position worth $32,500.
• If oil climbs to $66 per barrel, the position’s value increases by $500 (calculated as $1 x 100 barrels x 5 contracts), totaling $33,000. Selling at this point would result in a $500 profit, minus any transaction fees.
• However, if prices drop, the leverage works against the trader, potentially increasing losses.

Risks Associated with Oil Futures

The Commodity Futures Trading Commission (CFTC) advises investors to approach futures markets with care. According to the CFTC, “Speculating in commodity futures and options is highly volatile, complex, and risky, and is generally not suitable for most individual or retail investors. Many participants lose their entire investment and may even owe more than they initially put in.”

Alternative Ways to Invest in Oil

If you’re hesitant to trade oil futures directly, there are other avenues to gain exposure to the oil market:

• Oil Exchange-Traded Funds (ETFs): Funds like USO, BRNT, DBO, and OILK track oil prices, with expense ratios typically ranging from 0.60% to 1.43% or higher.
• Energy Stocks: Investing in shares of oil companies such as ConocoPhillips (COP), Occidental Petroleum (OXY), and Texas Pacific (TPL) can also provide exposure to the energy sector.