Wednesday, December 21, 2011

How to Invest in Oil

Oil prices are rising and oil demand is high, so you might be thinking about learning how to invest in oil. There are several ways that you can invest in oil, including but not limited to oil wells, oil stocks, and oil ETFs. Instead of complaining about the high prices of oil and gas, you could be making money through your investments in oil. Read on to learn how you can invest in oil and why you should start investing in oil sooner than later.

How to Invest in Oil: Stocks of Oil Companies

You can learn how to invest in oil by researching about stocks of oil drilling and service companies. The world of oil investing is always changing, so it’s important to keep up with current news and events in order to make the best decisions. For example, some experts recommend that investors look to stocks from deep-water drilling companies because right now these stocks are low-priced due to the bad publicity they got from the BP oil spill. Whenever prices drop on a specific group of stocks, it might be a good idea to invest in them because eventually, prices will probably go back up and you will be in a good position to make a tidy profit.

When you’re investing in oil stocks, you might want to look through seismic data and drilling reports to make wise decisions. This might require a lot of work on your part, but if you’re willing to work hard in order to see good returns on your investments, this might be the way to go for you.

Investing in the stocks of oil drilling and service companies isn’t the only way you can learn how to invest in oil. You could consider investing in sector mutual funds that specialize in the energy field. Sector mutual funds are mutual funds that focus on a particular niche of the stock market.

Some oil companies do not produce oil yet, but they on the lookout for oil reserves. These companies are called oil explorers. This is another way you could invest in oil stocks, but this method can be risky because you don’t know whether the oil explorers will be successful in discovering oil reserves.

If you decide you would like to invest in stocks of oil companies and refineries, you will need to open a brokerage account with a full service broker, a discount broker, or an online trading account.

How to Invest in Oil: ETFs

ETFs, or exchange-traded funds, are important to know about when you’re learning how to invest in oil. ETFs usually invest in oil futures contracts instead of energy stocks and are more connected with the price of oil. Some ETFs track the price of oil, while others track oil-related indexes. Some investors use oil ETFs as a hedge or to diversify their investing portfolios. You could invest in an ETF that specializes only in oil or a multi-commodity ETF that focuses on energy commodities, including oil, natural gas, and heating oil.

When you’re just beginning to learn how to invest in oil, ETFs can be a good place to start. Instead of researching on individual stocks of various oil companies, you could simply invest in an oil ETF and let it do all the work of selecting stocks and futures for you. With only one trade, adding an ETF to your portfolio will diversify your investments and give you exposure to the rising price of oil.

A bonus to investing in ETFs rather than mutual funds specializing in oil markets is that you will pay less in fees and commissions, even though you will still benefit from professional management that comes with investing in an ETF.

How to Invest in Oil: Speculation

Another way to invest in oil is to purchase contracts for oil futures. If you predict that oil prices will rise in the near future due to recent or upcoming events in the world, you could put your money on your predictions. This is a very risky method to investing in oil, but if you invest only the amount of money that you’re willing to lose, your risk could bring you a nice reward. Keep in mind that oil futures contracts can and do expire, so take that in account when you’re deciding on whether to invest in oil futures.

How to Invest in Oil: Spread betting

The simplest way to learn how to invest in oil is to become involved with spread betting the spot price of oil. It is when you take out a bet that the price of oil will rise higher than a level that you specify. If the price does rise higher than that level, you make a profit. If it doesn’t, you lose your investment. This can resemble gambling, so do a lot of research on spread betting to figure out whether this is the right avenue for you.

How the Oil Markets Work

The oil market goes through a lot of price fluctuations, so it can be confusing to learn how to invest in oil when prices can go up and down so quickly. There are a lot of different factors that can influence the oil markets. Factors include the demand, the supply, the quality, and the speculation of oil.

The demand for oil is very high these days, and it will only get higher in the near future. The U.S. Department of Energy predicts that global oil consumption will continue to increase after reaching 88 million barrels a day in 2011. Emerging markets, such as India and China, are constantly increasing their demand for oil. Other countries are in the process of industrializing their economic systems, so the forecast for oil demand is that it will continue to rise.

As for supply, it can increase or decrease at any given time. It’s important to be aware of what’s happening around the world in regards to oil drilling and production when you’re researching on how to invest in oil. New discoveries of oil reserves are always being made, as well as political situations (e.g. war) that can interfere with oil production. Some areas that had positive indications of oil supply in the past might have faced declines in production due to the oil reserves drying up.

The quality of oil will have an effect on the prices of oil investments. The most desirable oil is high-quality sweet crude oil. This type of oil meets the current environmental requirements that refineries need to abide by. When you’re learning about how to invest in oil, don’t forget to check on the quality of oil that you’re investing in.

Interestingly enough, speculation on the part of investors can also influence oil prices. When more investors are buying shares and oil future contracts, the price can go up. When they are selling them in large numbers, the price can go down. However, some experts say that speculation doesn’t have that much influence on oil prices, while others say that it does. Regardless of the degree of influence speculation has on the oil markets, it’s important for you to keep an eye on current trends in the stock market and be aware what investors are doing with their oil stocks when you’re learning how to invest in oil.

Why You Should Invest in Oil

While people are grumbling about the always-increasing cost of oil and gas, you could be one of the smart ones and start learning how to invest in oil so you can capitalize on the rise of the price of oil. Since there are many developing countries that are becoming more and more industrialized, the demand of oil will probably continue to increase in the future. When demand goes up and the supply doesn’t meet the demand, prices increase. If you grab this opportunity and invest in oil now, you might be rewarded with a nice return on your investment once prices go up due to the imbalance between supply and demand.

Before you take a step towards learning how to invest in oil, do all the research that you can. Start watching the price of oil and keep notes on how major oil ETFs and stocks react to various market conditions. Talk to as many financial experts and experienced investors as you can. Once you feel you have a good handle on the oil markets and how they work, you could start with investing in an oil ETF. As you increase your investments in oil, make sure that you continue to keep diversification in mind and put your money in different types of oil investments. And always include investments in other industries in your portfolio, so you’ll be on safer ground if the oil markets go through hard times. Last but not least, talk with your accountant about tax considerations when you’re learning how to invest in oil, since tax laws are always changing. If you do the research needed and cover all the bases, investing in oil can be a very profitable financial move for you.

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