Oil is one of the most precious resources in the world and plays a fundamental role in the global economy. Investing in oil can offer significant return opportunities, but it is important to understand the factors that influence the price of oil and the different investment options available.
Since the stock is highly volatile (and therefore high risk), it is possible to experience large gains in the short term, but also large losses.
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Why invest in oil?
Oil is an essential energy resource used for transportation, electricity generation and many other industrial sectors. Its demand is constant and growing, which makes oil an attractive investment option. Here are some reasons why investing in oil can be advantageous:
- Valuable resource: Oil is a limited and non-renewable resource, meaning its demand exceeds supply. This helps keep oil prices relatively high in the long term;
- Global demand: Oil is in demand all over the world and is used by many industries. Its large global demand ensures that there is always a market for oil;
- Portfolio diversification: Investing in oil can help you diversify your investment portfolio. Since oil has a low correlation with other assets, it can be an effective way to reduce overall portfolio risk;
- Return opportunities: The oil market is known for its volatility, which means significant return opportunities may be available to investors who are able to 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 a form of capital protection.
How to invest in oil
There are different ways to invest in oil, each with their own advantages and risks. Let’s look at the most common ones:
Invest in oil with stocks
It is possible to invest in oil indirectly, that is, by purchasing or selling shares of companies linked to the oil sector, which generally benefit when the price of oil rises.
This is a popular way to invest in oil. Oil companies are involved in the exploration, production, transportation, refining and sale of oil. When the price of oil rises, the value of these companies’ shares tends to increase.
However, there are also other factors that can influence the share price, such as company management and competition in the industry.
Investing in oil with CFDs
There are CFDs on stocks, futures, cryptocurrencies, and even on oil benchmarks. Since CFDs are derivative products, all that is needed is an available market and a liquid underlying instrument.
In practice, CFDs are mostly present on very large markets simply because the demand from investors is higher.
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 the price of oil or a basket of oil-related companies. Investing in oil ETFs can offer greater diversification than investing in individual stocks, since an oil ETF can track an index of oil companies.
Oil ETFs are tradable as if they were 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 companies in the oil sector. These funds allow investors to gain indirect exposure to the oil sector through a diversified portfolio of oil company shares.
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’s important to keep in mind that mutual funds involve management fees and commissions that can impact your overall returns.
Investing in oil with futures
Another option for investing in oil is through oil futures. 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 take advantage of fluctuations in oil prices to make profits.
Investing in oil futures requires in-depth knowledge of the market and a good understanding of the risks associated with this type of investment. Additionally, oil futures may require significant capital and involve trading costs.
Investing in oil with 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 need to do is decide by the deadline if you want to proceed. If you back out, however, you are generally required to pay a premium.
How the price of oil moves
The price of oil is very sensitive to changes in global supply and demand. Generally speaking, when demand is high or supply decreases, the price of oil increases. However, if inventories increase or demand decreases, prices will fall.
Geopolitical events such as the Covid-19 pandemic, Brexit, the price war between Russia and Saudi Arabia, and changes in macroeconomic productivity around the world also have the ability to push the price up or down.
The Organization of the Petroleum Exporting Countries (OPEC) is an international organization established to try to keep oil prices relatively stable and fair. Its member countries control approximately 75% of the world’s crude oil reserves and account for 42% of global crude oil production.
OPEC remains the main driver of oil prices, but the United States (as the country with the largest oil production in the world) can also boast a certain dominance in the sector.
Is investing in oil safe?
Anyone considering investing in oil should consider the volatility that characterizes the sector – the price of oil can rise and fall rapidly. Furthermore, on the ethical front, it is certainly not a suitable investment for those who want to build a green and sustainable portfolio.
In addition to natural price fluctuations and sensitivity to economic, political and diplomatic events, the price of oil is also negatively affected by unpredictable incidents such as oil spills, 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 towards renewable energy sources, it is estimated that fossil fuels still provide 85% of global energy. It is therefore reasonable to expect that the demand for oil investments will persist for some time to come.
How much money does it take to invest in oil?
Investing in oil is not just an option for wealthy investors. Several shares of well-known oil companies are often available on the market for less than $100 per share.
ETFs also represent an economical way to invest in oil. ETFs are traded on stock exchanges and investors can purchase individual shares of an ETF, similar to stocks, often priced below $30.
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