Investing in futures is one of the ways one can invest in the oil and gas industry. A futures contract is seen as an agreement to buy or sell a commodity or security at a future date at a price that is fixed at the time of the agreement. Buyers of this contract usually fix the prices today and use them to protect against higher prices at a later date.
Investing in oil and gas futures is quite lucrative if it goes your way, but you have to know how to go about hedging your investment to make profit. Futures contracts let you arrange to buy or sell a certain amount of oil and gas in the future, with the price fluctuating within the market. Oil and gas futures contracts give investors the chance to have a highly leveraged if not profitable investment.
Investing in crude oil futures contract
Investing in crude oil futures contract is one of the ways investors get exposure to the price of crude without having to deal with actual oil storage and other issues involved in owning the physical commodity. The deal is usually this way; if you buy a futures contract and the price of crude goes up, then you profit. If it falls, then you’ll lose money, and the contract seller will end up being the one to make money on the contract.
Buying oil futures
Buying oil futures is the most direct way to purchase the commodity without having to buy the actual oil (as was explained above). Oil futures contract can be bought from a commodities broker. They would enable you to buy a contract to purchase oil at a future date and price per barrel. The risks of buying oil futures are that you have to be right on the price movement and the timing of the price movement if you are to make any gains.
The following futures contracts are offered on the NYMEX at the CME Group.
Light Sweet Crude Oil (CL): These futures track West Texas Intermediate (WTI) crude and are quoted in U.S. dollars and cents per barrel. Each contract represents 1,000 barrels and is optionable.
Brent Crude (BZ): This may not be as popular as the WTI futures, but Brent offers a different kind of exposure to crude. These contracts, which are also optionable, represent 1,000 barrels.
E-mini Crude Oil (QM): E-mini Crude Oil futures on their own offer exposure to WTI crude, and they represent 500 barrels per contract. This allows for smaller investors to make a play on crude without having to shell out the hefty assets required for CL contracts.
Crude Oil Volatility Index (CVF): These VIX-based contracts offer exposure to the volatility exhibited in crude oil prices. The contracts are a bit tricky and complicated, and should only be used by those who are confident in the market. They can be a powerful tool for making a play on crude’s high volatility.
RBOB Gasoline (RB): Rather than investing in unrefined crude oil, these contracts invest in RBOB gasoline, which is simply the gas available at the pump. Some consider these contracts a better play on the consumer sector, as crude and gasoline prices do not always align.
Buying natural gas futures
Natural gas is a major source of power generation, especially for heating and cooling systems in the United States. Generally, the product is used to either power gas turbines or is burned to create steam and power steam turbines instead. The fuel is often preferred to coal or oil since it is far cleaner and produces less greenhouse gases than its other fossil fuel cousins.
Natural gas is the second-highest volume futures contract in the world based on a physical commodity. Natural gas futures contracts are traded on the New York Mercantile Exchange under the symbol NG. The market for these contracts is very liquid, and they are extremely active throughout the week. Trading in natural gas futures is generally heaviest on Thursdays, when the Department of Energy releases its weekly natural gas storage report.
NYMEX natural gas futures represent 10,000 million British thermal units (mmBtu), and are priced in dollars and cents per mmBtu. Contracts are listed for the current year plus the next 12 years. At the end of each calendar year, the next calendar years are added.
For those looking to invest directly in natural gas, investors can buy very liquid futures contracts for the fuel. The following are ways an investor can acquire natural gas futures.
Natural Gas (NG): These Henry Hub futures contracts, which are also optionable, are the most popular for establishing a futures position in this commodity. One contract represents 10,000 million British thermal units (mmBtu).
Henry Hub Natural Gas Last Day (HH): Also known as the look-alike last day financial futures, these contracts represent 10,000 mmBtu, and the futures settle on the last trading day of each contract month.
E-mini Natural Gas (QG): These contracts are not optionable, but represent just 2,500 mmBtu, allowing for smaller investors to still make a strong play on their favorite fossil fuel.
Oil and gas futures contracts can be quite complicated they usually require a rather complex futures account, and the average investor is usually advised to stay clear of them. For those who fully understand the nuances of these contracts, futures can be one of the most powerful trading tools, offering exposure that, in some cases, can’t be found anywhere else in the market. However, due to the high rate of volatility, futures contracts are highly risky, and an investor should tread with caution. Before jumping into these markets, you are advised to hire the expertise of an industry professional to help you out.