Oil shares, particularly the smaller oil exploration shares, are usually considered to be in the high risk, high reward sector. While possible to make a lot of money trading in oil shares, it is also possible to lose. That being said, oil and gas is widely traded and frequently recognised for its profit potential.

When someone says “oil” they are typically thinking of crude oil and natural gas. Crude oil, which consists of carbon, hydrogen, sulphur, nitrogen, oxygen, metals and salt, is distinguished as either sweet or sour. Sweet crude oil contains less sulphur, while sour crude oil contains more. Oil and natural gas are extracted from the ground, and then refined, before they are used in a variety of finished products including soaps, detergents, clothing, and more (petroleum products). Oil prices change depending on supply and demand. For instance, news of a new oil well can bring oil prices down, while a particular cold snap will increase the price of oil. As oil and natural gas are such important items in modern functioning, as well as somewhat volatile, investing in oil shares can be an interesting endeavour.

Large Cap, Small Cap?

Purchasing shares in oil companies, such as British Petroleum (BP) or Shell, have typically been the way investors gain exposure to oil. Yet oil shares also consist of small and medium sized companies involved oil extraction, transportation and refining. It is important to look at these companies’ access to mines, distribution methods, regional targeting and management teams when deciding whether or not to purchase. You may also want to consider company projections for oil demand going forward.

Oil prices, while commonly considered when looking at oil shares, are not a perfect indication of how that company will do. While an increase in the price of oil can benefit a company, as they are able to sell their final product at a higher price, it can also be detrimental. Oil companies require oil and gas for extraction and refining, which will increase their own costs. Many of the larger players are vertically integrated, meaning they have many functions and sources of revenue which do not benefit from higher oil prices.

Instruments in Oil

Instead of oil shares, an investor may want to consider an oil index. Indices often include shares in companies involved in the exploration, production, development and distribution of petroleum products. For private investors, the most popular way of gaining direct exposure to an oil price is via a Contract for Difference (CFD) or spread bet.

Purchasing the underlying oil is significantly less common than oil ETFs or oil shares. Large companies may purchase oil futures or options when requiring large amount of the commodity to run its own business, but this is much less common for a private investors to do so. Accendo Markets can provide you with an on-line trading platform to allow you to trade oil or oil shares using a CFD or spread bet.

The Industry

Oil companies often face negative PR that can impact the price of oil shares. For instance, there are many environmental concerns associated with oil extraction and transportation. Numerous spills have caused untold environmental damage. There are also significant health concerns for oil workers, both in extrication and refinement. As such, oil is a heavily regulated industry and there is ongoing debate between government and oil companies in terms of policy.

Trading or Investing

Before deciding to invest in or trade oil shares, find out about:

• Identifying the buy signals
• Identifying the next major oil find
• Identify your exit points
• How to trade oil shares on-line

Register for our daily Trading Opportunities for regular alerts on oil shares.