Total beginner starting to invest in oil

Question

I'm a total beginner in investing (I know very, very, very, very little). I did some investing in crypto but that's it.

I want to start learning to invest and I want to start with investing in oil. I have some capital to start on this journey. Since I'm at the beginning and everything is very confusing to me I expect to lose this but my goals for the moment are to learn, not to get rich. That will come later :).

My learning plan is this: buy some oil CFD/ETF/etc and see what happens to the cash that I invest and try to understand why my investment goes up/down (I know a demo account is best for this but I also want to invest some cash in oil as I think that will be productive short term - that is just a feeling of mine)

I have spent the last two days reading online materials and I have a few questions (I apologise to you, the more experienced traders to whom these questions might seem odd):

1. What would be a good trading platform for me to start trading? I mention again that I'm a total beginner in this. I will start by investing in oil a bit and also my plan for the future is to follow the energy segment. I'm located in eastern Europe (Romania) if that is of any relevance. I have an account on eToro. You can also create a virtual account and practice here which is good and I plan to do. Is this platform a good place for a beginner like me to start. Do you recommend a better one for what I want to do? (starting with investing in oil a bit, learning to trade, investing in the energy market later, etc).

2. Browsing eToro I looked around and found these things I can buy. This here is described as a CFD (contracts for difference). I have actually two questions about this.

   2.1. Here in the description of this it only says that it tracks 'Oil'. It does not however say which type of oil (WTI, Brent, etc) it tracks. I did some searching on the internet for the symbol 'OIL' and found out that is 'Light Sweet Crude Oil Futures'. What does this mean? What causes the value of this instrument to go up/down? For example for USO symbol I understand that it tracks the price of WTI so if the price of WTI oil goes up the price for USO should go up as well. But for the OIL instrument I donot understand what will cause it to go up/down.

   2.2. This is a more generic question about CFDs. From what I read and understood about CFDs they track something such as a commodity without you owning the actual instrument. If I think the prices for CFDs will go up I can buy some or if I have some and think the price will go low I can sell them and therefore make profit. I have read somewhere that with CFDs as opposed to ETFs you can lose more than your original investment. But if I buy a CFD at a price now(at price A) and sell it alter at a lower price(price B) then I obviously have a los(price of A - price of B) which is lower than the price of A. So how can you possibly lose more than your original investment?

3. About USO: USO is listed under ETFs on eToro. I understand it tracks the price of WTI oil. I was interested in this but I see the market is closed and I cannot buy this. How can I find out what are the market hours for this instrument? Do I have to find out on which market it trades or does it trade on different markets and I have to find out from which one of those markets eToro gets them from? How does this work?

Please help me clear this concepts by answering my questions and also please feel free to add any extra information you think might help me :D

Answer 1

In addition to those points already addressed in the comments:

It is important to understand that there is a difference between what we might call the physical oil market and the paper oil market, which consists of futures, CFDs, ETFs (such as USO) and other derivative instruments.

For example, the WTI futures prices for the near month (May) went negative earlier this week. This does not mean that any physical oil traded at negative prices. What happened was that the USO ETF, which holds about 25% of all open (long) positions on the near two months WTI futures, rolled its near month contract (May) into the July contract. In other words, USO was forced to sell its MAY position since the MAY contract was due to expire. The market smelt blood and took full advantage of the weak and vulnerable position USO found itself in. The selling quickly snowballed forcing the unwinding of their positions at any price - with some lots trading as low as -$38. As a result, USOs net asset values have been severely impacted. No physical oil traded at these prices and futures prices returned to positive territory the following day, once USO had fully exited their MAY positions.

My advise to you would be to restrict your activities to a demo account for long enough to learn the lesson that speculating in commodity prices is for professionals with large resources to back them up.

Answer 2

The CFD's, like commodity options, are likely backed-up or covered with futures contracts. So the CFD's are a retail product developed to have certain characteristics that are particular to CFD's.

In either case of investing in futures or investing in CFD's, oil is in extreme contango. That means that a buy-and-hold position will lose value if the price of oil just holds.

So consider a bull-spread instead of a buy-position. A long-term futures contract is sold while a near-term oil position is bought. If oil just holds its price then there is no loss on the near-term position while the long-term position benefits from contango. Then the bull-spread is generally expected to also profit from a rising market because the near-term position gains more than the long-term position loses. However, with the oil market currently so extreme then various surprises are possible.

Answer 3

I'm not an expert on "commodities" (of which oil is), but there are a few issues:

1. Oil is generally traded in the futures market.

This is the same market that the oil producers may be selling their future production capacity and refineries may be buying future product as they manage their refinery's capacity. As a market for professionals, it is not very consumer friendly. To give you some examples:

• Contract sizes are large. For example 1 Brent Crude Oil Future contract on CME represents 1,000 barrels. That means that a June contract that cost $20.46 would actually cost $2046.
• Contracts are is physically settled. If you bought a June contract, you could hypothetically end up with 1,000 actual barrels of oil on your doorstep. Or more precisely, you would receive a bill for storage for not picking them up. Some brokers will close-out your contracts for you prior to expiration so this doesn't happen. It is something to be aware of.
• Payment is different. When you buy a future you typically only pay the price difference between the price of the future and the underlying spot price. As the price of the spot price changes, your account will be debited or credited for that difference every day until expiration.
• Prices can have a different notation, for example, some contracts (not necessarily oil) can be priced in 32nds, e.g. "50'16" would actually mean $50+(16/32) = $50.50. This makes trading a little confusing.
• Futures settle in the future. For example with Brent crude, there is no price today, there is just the price at the settlement date of the future (e.g. the third Friday in June). People who want to have the exposure to the price today typically trade the 'front month' - i.e the nearest settlement date. But it then means that if you want to maintain your position and not get delivery, you have to roll-over your position.

This is not an exhaustive list. It doesn't mean you can't do it, but there is a lot of added complexity. Make sure you understand what you are buying and how it trades before you do. A "paper trading" account is your friend - it lets you trade with play money before trading with real money.

2. There are Exchange Traded Funds (ETFs)

Instead of going to the futures market, you may be able to by shares of a fund that holds oil futures in the stock market. This fund trades like a stock. However because of the rollover each month, it may not be possible for the fund to roll-over the future at an appropriate price (there would be variable price differences between the front-month and the second month). These would be explained in the funds prospectus, and you would be able to see by how closely the fund has performed against the historical oil price.

3. There are Oil companies (Stocks)

For a non-futures investor, one might be able to get exposure by buying shares of oil company stocks. The premise is that if the oil price goes up the company will do well and the stock will go up, and vice versa. However a specific oil company could have unique issues while another doesn't.

4. There are Oil or Energy ETFs

These ETFs hold a portfolio of multiple companies in the energy sector, so there should be a better correlation to the price of oil, because there is more diversification.

5. There are Contracts for Difference

I haven't explored these at all but the moment you start trading "over the counter" with your broker rather than on an exchange, it opens you up to all kinds of other abuse that you don't get on a publicly traded market.

Once you decide how you want to invest in oil, I would suggest looking at the exchange where the contract trades; then checking the membership list to see who you could open an account with.