How to Buy Oil

Determine whether you want to invest in oil, or to actually buy and own real barrels of oil. Investing in oil is much more common. The average person has no reason to buy large quantities of actual oil.

Crude oil is the world's most actively traded commodity. It trades on the New York Mercantile Exchange (NYMEX) as light sweet crude oil futures contracts, as well as other commodities exchanges around the world. Since oil is a commodity that is produced and in large quantities that are costly to transport, it trades in futures contracts. Futures contracts are agreements to deliver a quantity of a commodity at a fixed price on a fixed date in the future. These futures trade in quantities of 1,000 barrels, or 42,000 gallons of oil and settle in an actual physical delivery. So unless you actually want 42,000 gallons of oil and have some oil tankers handy, this option probably isn't for you.

Oil options are another way to buy oil. Options are contracts which give the buyer or seller the option to trade the oil on a future date. Options often have cash settlement, meaning that on the exercise date of the option, the buyer and seller just pay each other off based on the current price of oil rather than delivering the real physical oil to each other. If you choose to buy futures or options directly in oil, you will need to trade them on a commodities exchange. This can involve trading in huge blocks of money, opening special accounts at commodities exchanges, credits risks, and possible actual physical delivery of the commodity. You can also open a managed account at most large brokerages. With a managed account you can ask your broker to make the trades for you and advise you in the various risks associated with trading commodities.

The best way to invest in oil for the average buyer is to buy an Oil Exchange Traded Fund (ETF). An Oil ETF is a fund that trades in real time price changes on major stock exchanges. It is designed to closely track the movements of the price of crude oil. What the fund does is maintain various investments in the above mentioned oil futures and options markets, and then sells shares of its fund to smaller investors. You can buy ETFs online, and to buy an oil ETF all you need is a regular brokerage account. You can even use an online discount broker. Some common oil ETF stock ticker symbols are OIL, USO, UCO, and DBO. You can buy into or out of these funds any time during normal market hours, and you can buy shares in small quantities as opposed to the hundreds of thousands of dollars you need to invest in futures and options.

Finally, you can invest in oil through indirect exposure by owning various oil companies. These companies tend to own large amounts of oil and therefore their stock prices move in close conjunction to oil's price.