The oil market holds much promise for an investor. With price fluctuations and powerful forces driving the market, it enables significant profits in a short amount of time. Its accessibility means that it can be tackled by both beginners and experts in the field, allowing for a variety of investment opportunities and options.
Below, we cover the basics on oil investment, how it works, options available to investors, and a few tips to guide you through the industry.
Why Invest in Oil
In terms of basic economics, oil prices are only expected to rise with time. The amount of petroleum found across the world is limited, with the vast majority located in specific regions. However, the need for oil continues to increase worldwide as nations’ needs intensify with time. Because supply is lower than demand, there will always be a progressive increase in price, especially as petroleum sources deplete. This makes oil a sound investment.
While the concept may sound complicated, in today’s interconnected world, this is no longer the case. Buying and selling oil is made easy through online brokerage sites. This accessibility allows private individuals to invest in oil online while not having to store or care for the oil physically. Rather, it works by focusing on the price movements of oil in the market, allowing the investor to profit through the pricing position of oil.
How to Invest in Oil
There are various ways to get involved with oil. Each method comes with a varying risk of degree and can range from direct investment in oil as a commodity to indirect investment through energy-related equities or price movement investment.
A direct method of owning oil can be through the purchase of oil futures, when a certain amount of oil is to be bought in the future at a particular price. Futures are highly volatile and thus are considered high risk investments. Another direct method is through the purchase of commodity-based oil exchange-traded funds (ETFs). They are traded on stock exchanges and can be bought and sold similarly to stocks.
Indirect methods include the purchase of energy-sector EFTs and mutual funds. These funds invest solely in oil stocks and services and are considered low risk.
Additionally, online trading platforms offer a different way to invest in oil by speculating on the rise or fall of oil prices. This includes using derivatives offered by online brokers, such as CFDs, warrants or binary options, all of which allow for virtual investments based on pricing position.
What Influences Oil Prices
Oil prices fluctuate constantly so any sound investor should be aware of the key influencing factors that affect the market price. Doing so will help speculate both the increases and decreases in oil price and grow success rates. Anticipation and prediction of price movements is a learned process and is based on these external forces. The key influences are:
- Correlation to USD: Commodities are quoted in American Dollar. Thus, the price of a barrel of oil will increase or decrease relative to the strength of the dollar. When the value of the dollar increases, the price of a barrel of oil increases for foreign investors due to currency exchanges.
- Conflicts in the region: Much of petrol is located in the Middle East, an area known for its instability and conflict. At times of conflict or instability, petrol prices rise dramatically as less oil is produced. Following the news in the region is imperative to anticipating price changes.
- American & Chinese economy: As the countries consuming the most amount of oil in the world, the economy of both can affect the price of a barrel of oil. Recently, an impact was felt worldwide as both stock markets and commodity prices fell due to China’s unexpectedly slow economic growth.
Tips to Invest in Oil
Because oil can be a volatile investment, research and further understanding of its market is a wise idea. An investor should become familiar with how petroleum production works and how it can be impacted by global events. Following the news in petrol-rich countries is imperative, as is keeping up-to-date with economic newscasts from the United States and China.
Speculation should be more than just a guess; it should be a well-informed and strategic estimate on whether the price of oil will increase or decrease. Rely on advice from experts in the field, learn speculation techniques, and form a well-rounded strategy.
As long as you keep informed and create a solid strategy, there is high potential for profit in oil investment.