Here’s a complete guide on how to buy and invest in oil, as well as its risks, and the best tools to use.
How to invest in oil? In this article, we’ll explore how traders can invest in this priceless commodity, one of the most traded assets in the world.
Indeed, oil is probably the world’s most valuable resource. It plays a crucial role in the global economy and, for this reason, can yield significant opportunities to investors. One thing to note immediately, however, is the difference between the oil price and the different investment options available. It must also be kept in mind that oil can be a highly volatile asset, thereby offering huge possible gains, as well as terrible losses in the short term.
Let’s see how to invest in oil, both directly and indirectly, and all the different financial instruments at the trader’s disposal to achieve a sustainable return.
Why invest in oil?
Crude oil is used pretty much anywhere in the modern world. From obvious uses like transportation and electricity generation to the clothing and plastic industries, oil is an essential resource for our time. Its demand is constantly growing, which makes oil an attractive investment option. Here’s why investing in oil can be beneficial:
- Valuable resource: Oil is a finite and non-renewable resource, which means demand exceeds supply. This helps keep oil prices relatively high over the long term.
- Global Demand: Oil is in demand all over the world and used in many industries. Its large global demand ensures oil markets always exist.
- Portfolio Diversification: Investing in oil can diversify your investment portfolio. Since oil has a low correlation with other assets, it can reduce overall portfolio risk.
- Return Opportunity: The oil market is notorious for its volatility, which means that significant return opportunities may be available to investors who take advantage of price movements.
- Inflation Protection: Oil is a tangible asset that can protect against inflation. When inflation rises, oil prices tend to rise, offering capital protection.
How to invest in oil
There are several ways to invest in oil, each with its own advantages and risks. Let’s see the most common:
Investing in oil shares
It is possible to invest in oil indirectly, i.e. by buying or selling shares of companies related to the oil sector, which generally benefit when oil prices rise.
This is a popular way to invest in oil. Oil companies are involved in oil exploration, production, transportation, refining, and sale. When oil prices rise, these companies’ share value rises. However, there are other factors that can affect the stock price as well, such as business management and industry competition.
You can buy shares in oil companies through a broker, financial advisor, or bank trading account. There are many publicly traded oil companies offering oil investment opportunities.
Publicly traded oil companies can be divided into three main categories:
- Upstream: Companies that deal in oil and gas exploration and production, such as Saudi Aramco, ExxonMobil, BP, Royal Dutch Shell, ChevronTexaco, and SOCAR.
- Midstream: Focus on crude oil transportation and storage, such as Enbridge, Enterprise Product Partners, TC Energy Corp., Kinder Morgan, and The Williams Companies.
- Downstream: They refine and process crude oil into finished products, such as China National Offshore Oil Corporation, Schlumberger (SLB), and Exxon-Mobil (XOM).
Investing in oil with ETFs
Another way to invest in oil is through ETFs (Exchange Traded Funds).
Oil ETFs are exchange-traded funds that track oil prices or a basket of companies related to the oil sector. Investing in oil ETFs can offer greater diversification than investing in individual stocks because an oil ETF tracks an index of oil companies.
Oil ETFs are tradeable like stocks and can be bought and sold during exchange trading hours. There are several oil ETFs available on the market, so it is important to do thorough research before choosing the one that best suits your investment needs.
Invest in oil with funds
Oil funds are mutual funds that invest in oil companies. These funds allow investors to gain indirect exposure to the oil sector through a diversified portfolio of oil company stocks.
Oil funds can offer several benefits, such as professional portfolio management and the ability to invest in a wide range of oil companies. However, it is important to remember that mutual funds incur management fees and fees that can impact overall returns.
Trading oil futures
Another option to invest in oil is through futures on oil. Futures are contracts that allow you to buy or sell oil at an agreed-upon price at a future date. These contracts are traded on financial markets and allow investors to profit from oil price fluctuations.
Investing in oil futures requires an in-depth knowledge of the market and a thorough understanding of the risks associated with this type of investment. Additionally, oil futures can require significant capital and trading costs.
Invest in oil options
Oil options are financial instruments that offer the right, but not the obligation, to buy or sell oil at an agreed price and date.
Unlike a futures contract, there is no obligation to complete the transaction, which makes options less risky.
All you have to do is decide by the due date if you want to proceed. If you back out, however, you generally have to pay a premium.
How to invest in oil?
There are several ways to invest in oil. You can do this yourself using a trading account (or investment app), which can be opened online with a number of brokerage firms. This option is best suited to savvy investors who understand the oil market and the complex factors that can rapidly alter its price.
How does the oil price move?
Oil prices are very sensitive to changes in global supply and demand.
Generally speaking, when demand is high or supply decreases, oil prices rise. On the other hand, if inventories increase or demand decreases, prices fall.
Geopolitical events such as the COVID-19 pandemic, Brexit, the price war between Russia and Saudi Arabia, and macroeconomic productivity shifts around the world also can push prices up or down.
The Organization of Petroleum Exporting Countries (OPEC) is an international organization set up to keep oil prices relatively stable and fair. Its member countries control about 75% of world crude oil reserves and account for 42% of world crude oil production.
OPEC remains the main driver of oil prices, but the United States (as the world’s largest oil-producing country) can also claim dominance in the sector.
Investing in oil is safe?
Anyone considering investing in oil should consider the volatility that characterizes the sector - oil prices can go up and down rapidly. Furthermore, in terms of ethics, it is certainly not a suitable investment for those who want to build a green and sustainable portfolio. But that’s not all: you need to be an expert investor. Trading in oil is not suitable for risk-averse people.
In addition to natural price fluctuations and sensitivity to economic, political, and diplomatic events, oil prices are also negatively affected by unpredictable incidents such as oil spills. This is due to the high cost of restructuring operations and legal consequences.
On the other hand, it is impossible to deny that the world’s largest economies depend on fossil fuels, and oil in particular. Despite the new trend toward renewable energy sources, fossil fuels still supply 85% of global energy. It is therefore reasonable to expect that the demand for oil investments will persist for some time to come.
You should also pay attention to oil trading and investing characteristics. Although we usually talk about the "oil price", there is no single world oil price. Unlike, for example, gold, oil is not a single asset, but there are over 150 different oil mixes and indices, each of which can independently rise and fall in price (although there is often a correlation with the major indices).
For this reason, trading oil is more similar to trading stocks than trading commodities.
How much money does it take to invest in oil?
Crude oil is not an investment reserved only for wealthy traders. Indeed, several global oil companies offer their shares at less than $100 per share. That is without including ETFs, generally regarded as a cheap and safe investment for any oil trader. Sometimes, oil ETFs are priced below $30 per share, and can be bought similarly to other stocks.
Original article published on Money.it Italy 2023-06-24 07:47:00. Original title: [Come investire nel petrolio—>https://www.money.it/come-investire-nel-petroli
