Oil is used in a variety of ways, from heating your home to producing basketballs, deodorants, and other products you enjoy every day. Manufacturers, automakers, transportation agencies, and other organizations depend on oil to provide a wide range of products and services. There is no alternative to oil for many uses, so organizations invest heavily in it if they use it as part of their everyday operations. It thus offers a seemingly endless potential, and as such, provides an attractive investment opportunity.
You may use oil regularly, but you don’t have to be a big corporation or a millionaire to invest in it. Those who understand the factors that affect the price of oil can take the first step toward building a lucrative oil investment portfolio. This guide will go over how to invest in oil and help you get the most value out of your investment.
Factors that Affect the Price of Oil
Oil prices, like those of any commodity, are at the whim of myriad factors that work together or in conflict, all having large or small influences on the price investors pay. Sometimes the resulting fluctuations can be predictable or surprising, occurring over time or suddenly. Here are a few that any savvy investor will be watching:
1. Supply and Demand
Oil is not a renewable energy source. Approximately 94.25 million barrels of oil were produced each day in 2020. Only a finite amount of oil is available; this supply dwindles every day, which can affect the price of oil.
2. Quality and Location
Each country has its own oil refining capacity. There are also differences in where oil is produced for sale. These factors can affect the quality, availability, and price of oil.
3. Speculation
Institutional investors and Wall Street speculators bid on oil futures. This can lead to short-term swings in oil prices.
New investments in wind, solar, and other renewable energy sources may have far-flung effects on the price of oil. The use of renewable energy is increasing around the world, and this must also be considered relative to any oil investments going forward.
What Oil Investment Options Are Available?
There is more than one way to invest in oil. Different investors with varying levels of risk aversion can find an approach that fits their investing style. Here are a few popular oil investment options.
1. Stocks
You can invest in shares of companies that extract and produce petroleum. These stocks are bought and sold on major stock exchanges and vary in terms of price.
2. Mutual Funds
An oil mutual fund is a collection of oil industry stocks. Examples include exchange-traded and index funds.
3. Futures
Oil futures are contracts in which two parties agree to sell oil stocks or funds at a set date and price. Futures can rise or fall in value over time, depending on the performance of the stocks or funds associated with them.
Many oil investing options are available, and you need to weigh the pros and cons of them closely. Those who understand stocks, mutual funds, and futures can make informed decisions on whether to directly or indirectly invest in oil.
A Closer Look at Direct and Indirect Oil Investments
Oil investments fall into two categories: direct and indirect. A clear understanding of both types of investments is a must for those who are evaluating the oil market.
- Direct oil investments involve purchasing stock in an oil company. These investments entitle you to a share of any profits they generate.
- Indirect oil investments include energy-specific exchange traded funds (ETFs) and oil futures. ETFs consist of multiple oil company stocks, while futures can become more valuable if the oil market performs well for an extended period of time.
Both direct and indirect oil investments can be risky. You need to analyze the risks of any investments you make so you can effectively invest in oil.
5 Tips on How to Invest in Oil
It can be scary to invest in oil, particularly for those who are venturing into the oil market for the first time. Here are a few suggestions to help you decide how to allocate your oil investments.
1. Evaluate each investment opportunity
Review each oil investment carefully. Mutual funds are generally considered the safest investment option relative to the oil market. This is because mutual funds offer more diversity than stocks and tend to be less volatile than futures.
2. Start slow
Begin your venture into the oil market with a small investment. You can monitor the performance of your first investment; if you are satisfied, you can gradually build out your oil investment portfolio.
3. Diversify your oil investments
Resist the urge to put all your eggs in one basket. You can invest in a combination of oil stocks, mutual funds, and futures, resulting in a diverse portfolio.
4. Track your oil investment portfolio
Keep an eye on your oil investment portfolio. Conduct assessments at weekly, monthly, quarterly, and annual intervals, so you can watch your portfolio’s performance and explore ways to improve it.
5. Avoid rash decisions
Remain patient, even if your oil investments fluctuate in value. The oil market can be volatile, but investors who stay the course are well-equipped to maximize their profits.
These tips can benefit first-time and experienced investors who want to capitalize on the oil market. It is also important to consider the risks of oil investments before purchasing oil stocks, mutual funds, or futures.
Common Risks of Investing in Oil
No investor will be surprised to learn about the risks of investing in oil after a year that saw a stunning global drop in demand. Any investment can spring a surprise on its investors, and oil is no different. Risks associated with oil investments include:
- Dividend cuts that occur if an oil company does not earn enough revenue to fund payments to its investors
- Oil spills or other accidents that can cause an oil company’s stock price to plummet
- Commodity price volatility
- Lack of research into the oil market
- The coronavirus (COVID-19) pandemic or other global events that cause oil supply and demand fluctuations
A full understanding of oil investment risks is crucial. It may take many months or years to realize their full value. Those who practice patience are well-suited to optimize their returns on oil investments.
Contact an Expert With Questions About How to Invest in Oil
It can be tough to decide whether you should invest in oil. Bogart Wealth can offer assistance as you evaluate the oil market and other investment opportunities. Our financial advisors apply their skills and experience to your investment strategy, offering personalized investment management services so you can achieve your goals.
We are available to discuss our investment management services. Contact Bogart Wealth today to discuss your wealth management needs.
