How to Invest in Oil: 4 Ways to Start

Daniel Penzing
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Read on to find out how you can invest in one of the biggest commodities on the market.

Oil is one of the most popular commodities to invest in, due to its world-wide demand and supply. Investors who are interested in investing in oil can actually purchase contracts at certain exchanges for the oil market. This allows investors to hedge themselves against a rise in oil prices. If prices rise, the investor will be profiting from the increased costs. However, if oil prices drop, these investors will be losing money, but at least it will not be more than what they lost.

Buying contracts is not the only option, as investors can choose from several other avenues.

Oil Derivatives

Investors may choose to trade oil derivatives such as futures or options instead of actually buying the physical product. This allows those investors to participate in the market without actually ever having to see or touch the product. In the US, the CME Group is where most of these derivatives are traded. Trade companies also exist in other countries as well.

Investing in a Foreign Producer

Instead of buying oil directly, investors may want to consider purchasing shares of a foreign producer. While this is not always a good idea, it can be a great way to lower risk. Countries such as Canada and Russia have had great success in oil production because of their access to the harsh conditions. This is an option for those who do not have the proper safety equipment to venture into these conditions.

Investing in US Companies

Why Should You Even Consider Investing in Oil?

To say that the world is dependent on oil is an understatement. For proof of this, just look towards your kitchen. You can’t cook without it. You can’t drive your car without it. And a lot of the stuff in your home was made using it.

Oil powers the world. It powers everything that we have become accustomed to. That is why it is so important to be aware of everything that is going on across the planet… who is producing oil, who is using it, and where you can find potential investment opportunities. This will help you become aware of what is going on in the world and make smart decisions for your future.

And even though the world is dependent on oil, prices can’t be considered stable. They tend to fluctuate a lot, which causes the price of oil to rise and fall… sometimes rapidly. A price change can be good for you, provided you have the right information. And that’s why we’re here. To give you the information you need.

How to Invest in Oil

Investing in oil can be very risky. When you put your money into oil investments, there are many factors that you should consider before making the decision. If you have the right information, you can make the right selection. Here are some steps to help you on the way:

· Consider the Purpose of the Investment

A lot of times, investors buy oil specifically because of the potential of big returns they can get when the oil prices rise. As you know, most investors buy stocks to gain from growth on dividends. Oil is different in that the return is not directly correlated with company value. So, if you are looking at investing only for the potential of short term gains, then it is best to invest with a broker who will give you quick results.

· Review past Performance

To evaluate the potential of investing in the oil market, you need to know how it has performed in the past. You might find that it is safer to invest in some stocks than others. While you may gain some losses, they are not likely to be as significant if you were to invest in other end of the market. For more on investing read Investment

Invest in an Energy-Focused ETF or Mutual Fund

Portfolio managers typically try to invest at least 50% of their assets into stocks within the energy sector. If you’re an active investor, this type of allocation might be too high for your risk tolerance. But if you are a long-term investor with a strong stomach for volatility, you might consider diversifying your energy sector holdings across multiple sectors.

One of the easiest ways to do this is to purchase an energy-focused ETF. These funds are designed to mirror the performance of an index, providing an easy way to diversify your energy portfolio.

Some investors prefer mutual funds for their simplicity, but mutual funds that invest solely in the energy sector are extremely expensive. Because of this, most energy-focused mutual funds only offer a small allocation to energy stocks.

Instead, consider a diversified mutual fund that allocates approximately 40% to the energy sector. This provides nearly all of the benefits of an ETF without duplicate holdings and the added expenses that come with them.

Trade Oil Options and Futures

Oil futures and options are two of the most popular ways to trade oil prices. Futures are contracts that obligate the seller to supply a specific amount of oil at a certain time and price. These contracts must be fulfilled by the seller, which means that you don’t have to fulfill the supply side of the contract. This helps reduce your risk.

Using futures, you can establish long or short positions, depending on what you think oil prices will do in the future.

However, futures do not expire. They are only settled, which means you’re responsible for settling any gains or losses within the final settlement price.

Another thing to keep in mind is that because oil prices are so volatile, you can see a lot of fluctuations from day to day and even from hour to hour. Because futures expire in the distant future, you might not make the money you’re expecting.

Futures are based on the assumption that oil prices will actually rise and fall, so they may not be right for everyone.

A safer option is to invest in oil options. Like futures, these are contracts based on the price of oil. But unlike futures, you can exit your position without a loss by the third Friday of the month.

Invest in MLPs

Dividend-Rich Income Streams

Some people are intimidated by Wall Street and the stock market because it’s a difficult game to learn, new concepts to master, and can seem overwhelming at times. Fair enough, but we’re not talking about stock market investing. We’re talking about investing in oil through the energy sector, which is arguably the easiest and most lucrative investment business out there.

The energy sector has seen huge gains over the past decade. As the demand for energy increases, so does the demand for energy stocks. The energy sector is also more regulated than the stock market, and it’s considered more recession-proof because the demand for oil is always going to be there.

Investing in MLPs

MLPs are very easy to understand because their dividends have a known payout and unlike stocks, you know exactly what you own. Through limited partnerships, you can invest in whatever sector you’re interested in. This also means you’re diversified in the energy sector.

Buy Stock in an Oil and Gas Company

The simplest way to invest in oil is to buy stock in a company that produces and processes oil. You can buy shares through a brokerage firm like E-Trade or through a specialist like the United Financial Group.

You can select either an ETF that tracks oil companies or a single stock, but by that fact that the ETF or single stock can go up and down while oil prices are generally stable, investors are better off sticking with the ETF.

One of the best-known ETFs is United States Oil (USO), whose price is calculated based on the daily percentage change in the price of West Texas Intermediate (WTI) oil. Investors who are interested in international oil companies are better off with the United States Oil ETF (NYSE: USO).

Many of the largest oil companies also issue preferred stock, a lower-risk investment that pays a fixed dividend.

My Personal Experience with Oil Investing

This post shares the story of my personal experience with investing in oil stocks and providing a brief overview of the market. I started investing in oil a few years ago and this is the story of my initial successes with investing in oil companies and my failures.