How to Invest in Oil

November 30, 2020 - Мария Давыдова

Oil, especially crude oil – is one of the most demanded commodities of the age. Most of the world machinery is working on the oil and its products, not to mention all other products based on oil. This is exactly the reason why many investors choose it as their primary.

While it’s very volatile as of late (because of numerous economic recessions, 2020 COVID economic crisis – the latest of them), you can trust the resource, and your investments, consequentially, to stay afloat. Why? Because the World’s most powerful countries, not to mention corporations, want the commodity to stay afloat.

Research

Of course, investing and trading in oil requires a good deal of homework. The prices directly depend on supply and demand, but there are many more factors that affect both the production and consummation of oil. Most of them are associated with politics, in one way or another.

For instance, 2/3 of World’s oil supplies are controlled by OPEC. The political decisions of its members (most notably, the Arab countries) can directly affect the value of oil regionally or even globally. These countries can regulate the world prices at will, and the decision of doing that very frequently have political basis.

As you can see, before investing in any quality you have to do your homework, see what events are currently unfolding, how they affect or can affect the value, and what’s going to happen next.

Direct oil investing

There are several major ways to invest into oil and reap benefits of value growth: indirect and direct. For its part, direct investments also divide into smaller subtypes.

• Commodity trading

Direct method of investing implies investing your money into the crude oil as a commodity. You can do it with ease on Umarkets, for instance. Commodity trading is one of the most popular and oldest types of trading, and oil is held in high demand.

The most common type of oil trading requires the use of oil futures, alternatively – oil options. They have a highly speculative quality in their nature, because both deals (option and future) have a set date and a set price. The primary different is obligation.

With future on hand, you must conclude the deal for the set price on the set date. But with option, you may or may not go ahead with the deal. They are basically contracts. If you want to buy/sell oil, you may need one of these. The bottom line is that you specify the price of the deal even before the contract is signed.

This way, you may win some profits if the price is lower than market price on oil at the day of delivery. Alternatively, you can lose if the prices dropped. That’s why such type of oil investments is speculative. You speculate, or predict, what the price is going to be on the chosen day.

• ETFs investments

Contrary to investing directly in the commodity, you can invest instead in the companies that produce oil. Buying stock in oil be done in many ways and variations.

First of all, you can invest into the stock of the prominent oil-producing companies, or in ETFs. They are very alike, actually. While stock is generally a share of company or its profits, ETF is a stock of a fund. Funds, like companies, are founded specifically to be traded on exchanges, hence the name – exchange-traded funds.

So, if you want to invest indirectly, you have two options. If you trust the usual method of investing in stock, you can go with the former option. However, ETFs have its own properties and perks.

Depending on the fund, it can have various purposes. Some funds help their creator companies track the value of their commodities in the unrestricted space. Therefore, everyone is welcome to buy in and sell whenever they want. You can buy a share of exchange-traded fund and then sell it when the situation on the market changed.

In case of ETFs, the shares and their value are generally tied to some amount of commodity. The oil-based funds usually choose barrels of oil as a standard. As a rule, you can see how many barrels each share costs before investing.

Indirect oil investing

As to indirect oil investing, you can gain profit from oil price fluctuations by holding onto energy-based ETFs. It’s a wider type of ETF that doesn’t only keep track on oil prices, but also the wider energy (oil, gas & more) sector. They are still very tightly tied to oil prices, but their partial diversification decreases the risks. If you’re overly-worried about oil volatility, then indirect exposure to oil must be your choice.

Alternatively, you can also invest buy a share of the energy-based mutual funds. These ‘mutual funds’ are collective hoards of money backed by investments portfolio. If you buy into the energy-based mutual funds, your newly-acquired share will generally speaking be a part of this portfolio.

The portfolio can be seen beforehand, and the chief advantages of such way of investing, is that mutual funds are collected and operated by professional managers and investors. Consequently, your funds are usually in good hands and quite safe.