Investing in Oil: Through Thick & Thin
It takes millions of years for oil deposits to form. Yet crude oil is an essential commodity for global markets that’s quickly consumed. And while this is undoubtedly a lucrative investment opportunity with high earning potential, it’s also complex.
You have to know when and how to invest in oil. Keep reading to find out more about fluctuating oil prices and the many different types of trades on global markets.
Different oil investments
There are several ways to invest in oil. One of the most popular is the purchase of oil exchange-traded funds or ETFs that are traded on stock exchanges around the world.
Another investment involves the purchase of oil futures, which requires a lot more money. But for many, this is the best way to buy oil, and it’s how most of the world’s petroleum is traded.
If you’re working with a tighter budget, you can make indirect investments in crude by buying stocks in oil services companies. These energy-specific ETFs cover a broad range of options in the gas and oil drilling sector.
Here is a closer look at the different investment methods:
- ETFs consist of financial items specifically allotted to different oil stocks, funds, or oil commodities. Most traders agree that this is the easiest option and a good place to start.
- Futures are derivative securities that allow the investor to buy oil by settlement date for a determined price. If you want to know how to invest in oil futures, start by doing research. Futures are highly volatile and are affected by a long list of factors like production, GDP, economic data, and global demand. But if you can forecast the future oil price correctly, you can make a decent profit.
- Mutual funds consist of many shares from different investors. They are operated by professional money managers and invested in stocks related to oil and oil services companies.
- Investments in stocks of oil and gas companies carry less risk than some of the alternative options. But remember that oil stock prices are unpredictable, and any list of oil stocks you have may fluctuate in accordance with market conditions.
Things to Remember
Trying to figure out how to invest in oil stocks isn’t easy. Here are a few key factors to keep in mind when you’re getting started:
- Current market status: Oil prices are easily affected by everything, from OPEC decisions about output to political unrest and supply and demand. It’s a risky but lucrative investment if you do your homework.
- Your initial fund: Start small and get firsthand experience before getting into heavier investments.
- The types of stocks or investments chosen: Each carries different risks and rewards.
- Basic knowledge of the oil industry: There is a direct correlation between the stock and oil markets. The amount of stocks you buy should be determined by global oil prices.
How to invest in oil and gas as a beginner?
One of the easiest ways is to buy through online brokerage companies that deal with oil funds. Make sure you stick to brokers that offer commission-free trading. Beginners can also start investing through options trading platforms before moving up the oil investments ladder. Meanwhile, using trading applications offers an added convenience. The easy-to-use interfaces enable users to gain quick access to their portfolios while offering useful tools like stock alerts and breaking news.
If you’re still wondering how to invest in oil with little money just remember to stick to some of the aforementioned methods including stocks and ETFs because these options don’t have a minimum investment size.
Of course, choosing the right oil stocks to buy can be tricky due to their unstable nature and fluctuating prices. As such, the best investment strategies center on portfolio diversification where you invest your money in several options.
Oil as a commodity investment
You can also invest directly in oil as a commodity. And since this is a crucial natural resource that powers much of the world’s economy, such investments can be highly lucrative. Start by looking at how to invest in oil well drilling directly.
There are several ways to do this including through private placements where you become the owner of an oil well by putting your money into oil and gas drilling projects. In addition to the high earning potential, this option comes with tax sheltered income and other very generous tax advantages.
Another direct investment method is to purchase commodity-based ETFs, which shields you from risks in spot prices. Investments in the aforementioned oil futures can also be profitable but comes with more risk.
Additionally, oil and gas investment opportunities can extend to companies that process and carry crude oil. This is an indirect investment but can still include actual operations such as transporting and oil storage.
One could have the physical oil supply too if the funds, futures, or options investment carries it as a commodity, and qualifies for physical delivery after trading.
Investing in oil in 2021 comes with new challenges. The global oil stock price plummeted to record lows in 2020 when demand for the commodity dipped due to the unprecedented economic crisis caused by Covid19.
The outlook for 2021 is more optimistic. In Q4 of the previous year, activity in the global oil and gas sector jumped with spending expected to improve in the coming months.
Analysts predict that oil stocks and investments will stabilize again despite the highly volatile global economy. Of course, all of this is having a profound impact on how to invest in oil in the short term.
Moreover, investors are wary of other emerging factors that can affect prices, including Tesla E-cars, share-riding, and eco-friendly measures designed to reduce fossil fuel consumption and carbon footprints. Even President Joe Biden’s economic policies can affect the United States oil fund stock prices. All of this is yet to play out in the coming months and while we should expect slight improvements in oil markets, we should also keep a close eye on price fluctuations when buying crude oil stocks.