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How to invest in energy commodities in 2023
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82% of retail CFD accounts lose money.
It takes a few minutes to invest in energy commodities through an online trading platform. This guide takes you through the process, picks out popular energy commodities to invest in, and explains how the energy market works.
What are energy commodities?Copy link to section
Energy commodities are fuels that we use to power our daily lives. From crude oil that becomes the petrol and diesel to drive our daily commute, to the uranium that fires nuclear power stations, they play a crucial role in the world today.
Oil is by far the most widely traded commodity but there are many others that you can invest in as well. Natural gas is a growing sector, while renewable energy makes up an ever larger piece of the overall pie.
How to invest in the energy sectorCopy link to section
All you need to do to start investing is to sign up with a commodities broker. But you should take time to learn about the market, decide which commodity to invest in, and settle on the best way to invest beforehand.
This quick guide explains how to start energy investing. After that, find more guidance to help you every step of the way.
Step 1. Research the energy market and learn how it worksCopy link to section
Learn how prices move, key dates in the calendar, and the different ways to trade.
Step 2. Decide what type of energy commodity to invest inCopy link to section
There are lots of different types of commodities, pick one or two that best suit your interest and expertise.
Step 3. Choose how you want to invest, and for how longCopy link to section
Do you want to be a long term investor or a short term trader? Use this answer to choose between ETFs, stocks, and futures contracts.
Sign up to a commodities brokerCopy link to section
Our recommended broker is eToro . Create an account to get started.
Step 5. Start with a demo accountCopy link to section
Gain practical experience investing in the real market using virtual money. All beginners should start with a demo account to learn the ropes.
77% of retail CFD accounts lose money.
Why invest in the energy industry?Copy link to section
Energy commodities offer a way to take advantage of the world around us. Their performance is often very different to the stock market, as prices are affected by different factors and often have a much more global reach.
Here are some of the reasons energy investing is popular and why you might want to get involved.
- Energy commodities offer protection against inflation. Periods of high inflation usually coincide with rising energy prices. Investing in oil and gas offers a way to take advantage of that environment when the value of money in your pocket is failing.
- It’s a way to diversify your investment portfolio. Having different asset classes in your portfolio is generally considered a good idea. By creating balance, you create a margin of safety, where you’re less exposed to failure in one area of the economy.
- You can use energy commodities to hedge your other positions. As energy commodity prices act differently to stocks, bonds, and currencies, they can be used to hedge those positions. If your stock investments would suffer from rising inflation, then investing in some commodities as well reduces the overall damage.
- There’s always demand for energy products. Our society is so reliant on power and transportation that there is constant demand for fuel. It’s also hard to create new supply at speed, so prices have a relatively high floor.
- To speculate on future price changes. Many people use the energy markets simply as a means to speculate. Oil trading in particular is popular, where traders can use futures contracts to predict how prices might rise or fall in the future.
What are the risks of investing in energy?Copy link to section
Energy markets can be dangerous to newcomers who don’t understand them properly. The forces that affect prices can have a sudden and dramatic impact, while positions that use leverage are at risk of liquidation if markets move against you.
Consider these risks before you start investing in energy and use them to influence how and when you invest.
- Energy commodities are volatile. Energy prices can rise and fall very quickly and with little warning. You can lose money fast, particularly if you use leverage and the market moves against you. It’s important to use stop-loss orders and be careful with leverage to avoid big losses.
- It’s hard to predict weather events or climate change. Energy commodities have to be moved around a lot and require vast transportation networks in order to operate. Disruption to those networks, or an issue at the production stage such as an extreme weather event or a fire, can have major repercussions.
- Geopolitical events play a large role in energy prices. The Russia Ukraine war is one example of how conflicts or border disputes can cause a huge shift in energy prices. Because it’s so important, energy is intensely political, and inherently uncertain.
- Energy investing requires intimate knowledge of the markets. Energy markets are not the same as stock markets and require a different set of skills and knowledge. Beginners can get caught out if they don’t understand the rhythms of the markets and lose money right out of the gate.
- Commodity markets are often cyclical. There are often natural (or man-made) cycles to production that mean markets revert towards the mean over time. Energy production is also so political that sometimes governments intervene to reverse price trends.
What energy commodities can I invest in?Copy link to section
Crude oil is the most popular energy market. It’s made up of two benchmarks: Brent Crude and West Texas Intermediate, and you can invest in either. Learn how to invest in popular energy commodities with these investment guides.
How can I invest in energy commodities?Copy link to section
A common way to invest is to buy shares in an energy ETF, fund, or trust. This is generally the easiest way to invest in energy for beginners.
As you gain experience, you can branch out and try investing in other ways, such as using futures contracts to speculate on price changes, or buying shares in energy companies.
Here are some of the different ways to invest in energy.
1. Invest in energy ETFsCopy link to section
ETFs, or exchange-traded funds, are investment vehicles that track the performance of a particular asset, industry, or index. You buy shares in an energy ETF to gain exposure to the energy sector.
Some ETFs track the price of a specific commodity, such as [type]. Others own a batch of related energy commodities or track an index of energy stocks and so allow you to invest in the sector as a whole.
ETFs generally have a low cost of entry, so you can invest with a small amount of money, while you can invest through a regular trading platform, so they’re accessible to everyone.
Here are some popular energy ETFs that invest in the energy sector:
- iShares MSCI World Energy Sector (AMS:WENS)
- Lyxor MSCI World Energy (LON:NRGW)
2. Invest in energy funds or trustsCopy link to section
Funds and trusts are actively managed investments, where a fund manager pools together money from lots of different people and decides what to invest in. Each fund has a defined goal, such as to outperform a particular energy index over a period of time.
This type of investment normally requires each person to put up a substantial minimum deposit in order to join. There may also be a limited number of places available, so you can only buy shares in the fund when someone else wants to sell their spot.
Here are some of the best energy funds to invest in:
- BlackRock Sustainable Energy Fund (MRNLU LX)
- The Renewables Infrastructure Group (LSE: TRIG)
3. Buy stocks in energy companiesCopy link to section
Another option is to invest in companies that have exposure to the energy industry. These could be businesses involved in mining, extraction, or transport, or they could be renewable energy companies.
There are lots of factors that affect a company’s stock price. So while investing in energy stocks is a way to get some exposure to the industry, there may not be a perfect correlation between energy prices and the fortunes of a stock price.
Some of the best energy stocks you might want to consider are:
- NOV Inc. (NYSE:NOV)
- Cheniere Energy Inc. (NYSEAMERICAN:LNG)
4. Trade energy futures contractsCopy link to section
Futures contracts are the most common way for the experts to trade energy commodities. With futures you can speculate on energy commodity price changes, and predict whether you think they’re going to rise or fall.
You need plenty of experience and industry knowledge to understand the futures market and trade it successfully. Some energy markets can be highly illiquid and have large spreads, particularly during periods of price volatility.
Here are some popular energy commodities that you might want to trade.
Where can I invest in energy online?Copy link to section
eToro is the best place to start for beginners.
Our experts have compared 63+ commodity brokers to find the ones with the best security, lowest fees, and the largest range of markets.
Here are the top three platforms we recommend.
77% of retail CFD accounts lose money.
Is energy worth investing in?Copy link to section
Yes, energy commodities are a way to add diversity to your portfolio. Commodities act quite differently to other asset classes, like stocks, currencies, or crypto. Investing in some of each type of asset means you can succeed in different economic environments.
However, to invest successfully you have to spend time building an understanding of what moves energy markets. You need to set expectations and to embrace uncertainty. Energy is uniquely sensitive to political instability and sudden changes can have a big impact on your bottom line.
It’s a good idea to sign up for a commodities platform that has a demo account. That way you can practice and gain experience using virtual money before diving into the real thing. All of our recommended brokers above offer demo accounts, so that’s a good place to start.
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >