Although investment in oil futures is risky, some investors have found commodities to be an alternate asset class to equities or bonds.
- TIP: When you buy oil futures, you do not pay the full value of the contract you purchase. Instead you pay an initial margin that acts like an insurance deposit. The initial margin represents a percentage of the value of the transaction.
- Step 1: Know that individual positions are evaluated at the end of each trading day. If your position is profitable, the profit accrues to your account. If your position is not profitable, the loss will be deducted from your initial deposit. You will also receive a margin call to make up the difference.
- Step 2: Accept delivery of the oil at a predetermined location or accept cash on settlement day. Most investors who speculate close out their contract before the contract is due and never take delivery of the oil.
- FACT: As of 2010, Saudi Arabia had one-fifth of the world's proven oil reserves.
- Step 3: Put down a deposit with the broker. The minimum amount required varies with brokers.
- Step 4: Complete the required paperwork stating that you understand the risks of oil futures trading. Be aware that prices can swing widely and rapidly.
- Step 5: Know that oil futures are traded on regulated futures exchanges. Trading can take place using online electronic systems, or by open outcry around a pit, or by some combination of both of these.
- TIP: The main futures exchanges for crude oil are the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
- Step 6: Open a new brokerage account if you are not a member of an exchange and if you do not have a broker who trades oil futures.
- Step 7: Learn as much as you can about trends in oil supplies. The U.S. Energy Information Agency publishes weekly oil supply data and the International Information Administration also analyzes oil trends.