updated on September 29, 2022
5 minutes of reading
Oil is one of those investments that has its own mystique, evoking images of oil tycoons searching for black gold.
The reality is more mundane, and oil stocks are no more likely to make you rich than any other asset class or alternative investment.
However, because oil prices are highly volatile (and therefore high risk), they have the potential for large short-term gains, if you’re lucky, or large losses (if you’re unlucky). .
There are several ways to invest in oil, including direct and indirect investments.
Learn more about how to start investing in oil and whether it’s the right choice for you below.
what affects the price of oil?
Oil stocks are highly sensitive to changes in global supply and demand.
To put it bluntly, if demand is high or supply is down, oil prices will go up. if new reserves are discovered or demand falls, prices will fall.
Geopolitical events such as the COVID-19 pandemic, Brexit, the Russian-Saudi price war, and changes in global macroeconomic activity can also push the price up or down.
The Organization of Petroleum Exporting Countries (OPEC) is an international organization established to try to keep oil prices relatively stable and fair.
its member countries control around 75% of the world’s crude oil reserves and produce 42% of the world’s crude oil production.
opec remains the main driver of oil prices, but the us. uu. (as the largest oil-producing nation) is enjoying a resurgence thanks to new shale oil reserves and is challenging its dominance of the sector.
is it right for me to invest in oil?
Anyone considering oil as a potential investment should especially consider these factors:
- volatility: the price of oil can go up and down quickly
- ethics: investing in fossil fuels will not suit those looking for green investments
- complexity: it will have to be an experienced investor
oil is not a good option for very risk-averse investors.
In addition to price fluctuations and sensitivity to economic, political and diplomatic events, accidents such as oil spills can also have a negative impact on share prices, due to costly cleanups and legal consequences. . it also won’t suit those looking for ethical investments.
on the other hand, the world’s largest economies depend on fossil fuels and, in particular, oil.
Despite the global trend towards renewable energy sources, fossil fuels are still estimated to provide 85% of our global energy. therefore, oil investment demand is likely to linger for some time.
The level of sophistication in oil trading should also not be underestimated.
Although people talk about the “price of oil”, in reality there is no single price of oil. Unlike, say, gold or platinum, oil is not just one asset, but more than 150 different oil blends and indices, all of which can rise and fall in price independently (although there is often a correlation ).
As such, oil trading is often more like stock trading than commodity trading.
if you are already an experienced investor in stocks & stocks and you want to explore new challenges, and the ethical angle doesn’t discourage you, then oil stocks could well improve your portfolio.
A typical use for them might be in the small “high risk” portion of your portfolio, where you can generate strong returns without putting a lot of your capital at risk. you might as well consider oil stocks as part of a sip.
which investment vehicle should I choose for oil?
There are several different ways to invest in oil.
each option has its pros and cons.
You can invest in oil indirectly by buying shares in oil companies, such as exxon mobil or bp.
This strategy is the most accessible for experienced investors, since it is the same process as buying shares in any sector.
If oil prices are low and you have the patience for a long-term investment, buying an oil company could be a less hair-raising journey.
commodity-based oil ETFs
exchange-traded funds (ETFs) are a way to buy direct shares in a single type of oil, such as brent crude oil.
They are bought and sold in a similar way to stocks, but they are traded on their own stock exchange.
The price of these products fluctuates throughout the day as they are bought and sold, as they do not have a set trading window. this means they can be useful assets if you are looking for a short-term or liquid investment.
energy sector tf
You can also invest in an ETF that covers a number of different energy products, such as natural gas and heating oil.
Choosing an ETF with a broader focus may offer more protection against market volatility, but is still riskier than traditional stocks.
investing in oil “futures” is the riskiest strategy and requires you to have significant capital.
Basically, a buyer will agree to buy oil shares at a later date for a fixed price when the “futures contract” expires.
the price they agree on could be very different from the current market price, as it uses a complex model to predict future cost.
This can lead to huge profits or losses for the buyer or seller when the price inevitably swings in their favor. essentially, it’s gambling.
An option gives you the opportunity to buy or sell oil at an agreed price.
Unlike a futures contract, there is no obligation to enter into the transaction, making it less risky.
All you have to do is decide before the expiration date if you want to continue. to afford to back out, you’ll usually have to pay a premium.
should i use a stockbroker or ifa to invest in oil?
You may need help from both an ifa and a specialized oil broker or stockbroker to give yourself the best opportunity as an oil investor.
ifas do not generally select stocks and will not advise you on particular stocks or shares. however, they will help you understand how much risk you can afford to take, and therefore how much of your money you can reasonably speculate in the oil markets.
Keep in mind that their advice may well be ‘don’t do it!’, if given the green light, be sure to listen to their words of caution and don’t invest more than you can afford to lose. .
An oil broker or specialized stockbroker can give you more detailed advice on the investment itself. however, remember that a stockbroker is not obligated to act in your best interest, unlike an ifa who is.
how do i invest in oil?
There are many ways to invest in oil. You can do this yourself using a business account, which can be opened online with various brokerage firms. this option is more suitable for experienced investors who understand the oil market and understand the complex factors that can quickly alter its price.
If you feel confident enough to consider futures and options contracts, this may be a better fit for you.
However, if you are new to investing or have never invested in oil before, ask your ifa which vehicle is best for you.
Remember that no matter how you approach your investment, returns are not guaranteed and you may lose more than you invest.
However, an ifa can help you make sure you’re not taking more risk than you can tolerate, and help you design your investments around your overall financial goals.
If you found this article interesting, you may also find our article on pensions versus real estate investments informative.
connect meI would like to speak with a financial advisor