Did you know that investing in crude oil can yield many profits especially if you invested right? In our world today, most economies depend solely on crude oil for income and its demand is high in the global market.
Becoming a crude oil investor offers excellent financial benefits when the market works out in your favor. On the other hand, it also carries an equal amount of risk. To help you navigate and invest better, this comprehensive guide will be of great help.
Investing in oil isn’t for the faint of heart, but it can be a gratifying investment opportunity when done with care and diligence.
In this guide, we’ll highlight notable tips that will help you invest better in crude oil. Stay with me!
Is Investing in Crude Oil a Good Investment?
Investing in the oil and gas sector is good no matter the risk also involved. Asides from this, investment in crude oil is highly profitable. This is why it’s very attractive to both traders and investors.
Dividends are also being paid by companies in the oil and gas industry. These dividends allow investments in the industry earn regular income.
However, 2020 was a good year for the oil and gas sector due to the collapse in price and demand. That meant a lot to oil investors.
Investments in energy projects have a lot of advantages as it brings about higher returns. Such benefits make oil and gas investments worth considering in your overall strategy.
READ ALSO: 15 Top Energy Trading Companies in 2022
What are the Different Ways to Invest in Oil?
There are different ways to invest in crude oil. Below are some notable ways:
1. Exchange-traded Funds(ETF)
Direct exposure can be gained by investing through ETF. There are a number of ETF commodity options an investor can choose.
One can choose a single commodity (Oil) or varieties of commodities (Gasoline, natural gas etc)
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2. Oil Futures
This can also be referred to as oil and gas futures. It can be complex and risky. But like it was initially mentioned, investing is not for the faint of heart.
It has to do with a seller and buyer completing a said transaction at a said price and a set date in future. For example, You can sign a contract to deliver 600 barrels of oil at $60 on July 31st 2021.
If you buy at $60 and it increases to $70 per barrel, you can sell the contract to another party for a profit. However, the seller delivers the oil at the price of $60 per barrel and the holder of the contract gets to buy oil below market price.
If it falls, the buyer won’t be able to make any profit after he sells.
3. Oil Wells
One can rightly call it a direct participation program in oil Wells.
They are passive investments but have long time space often six(6) to fifteen (15) years or more.
It involves oil and gas in different forms. it can be drilling, storing or refining.
So, it’s important you know what your participation in the business is. Also, be very careful to know the partnership business plan and team. If the partnership doesn’t make any profit, you lose.
4. Purchasing of shares in oil companies
This is another way to invest in oil. These companies work in different sectors and you can get started with the cost of a single share or less. Some companies pay dividends which lets you earn from your investment.
How To Invest In Oil – A Beginners Guide To Oil Investment
Investors who want to invest in the oil market have quite a range of options to choose from when it comes to investing.
Some investors would like to invest in just oil while others will like to invest in varieties like oil, natural gas, gasoline etc.
One simple way for the average person to invest in oil is through stocks of oil drilling, service companies, or ETFs that specialize in these sectors.
Investors are given the opportunity to invest in the different options provided.
One advice given to investors is to gather information through research based on the oil business or meet a professional in investment.
As an investor, you can own oil through the purchase of energy sector ETF, like iShare Global index fund and the energy specific mutual fund: T. Rowe Price New Era Fund.
The energy sector ETF and mutual fund invest on stocks and service companies with low risk.
Pros and Cons of Investing in Oil
While the idea of investing in crude oil might sound all pleasing, there are specific pros and cons you need to be aware of.
#1 High profitability
Investors or people who invest in oil are likely to make a profit especially if they are involved in oil wells and oil futures. A single oil can make more revenues if an oil producer gets lucky.
#2 Tax gain
Many oil and gas companies get some tax gains from government that are not seen in other industries.
Those who involve in DPP are those who see significant tax savings often.
An investors portfolio is been diversified due to the oil and gas companies and also as a result of it’s essentiality in the economy especially transportation. Exposure to oil can bring down prices in the companies share.
#1 High cost
After investing in oil, there are some fees you need to pay. These fees are referred to as charge management fees or commissions from some brokerages. Some of these high fees come from involvement in oil and gas like DPP.
#2 It is complex
Direct investment in crude oil is great in reward and also complex. So one needs to understand this before starting out.
Generally, some commodities are volatile as well as oil and gas. So investing in such companies, one should expect volatility no matter how you invest.
But you need to get it that your portfolio will rise and fall.
Should I Invest In Crude Oil?
Now that I’ve spelled out the pros and cons, it’s fair to say that you should invest in crude oil if you are comfortable with the risks involved.
If you decide to invest in oil, be sure to be aware of the risks involved. There is also a chance you could make a lot of money. However, educating yourself ahead of time is the best way to lessen your risk and increase your chances of profitability.
How To Invest In Crude Oil Market With High ROI
Investing in oil is not really that easy but one can make profits from them.
One can invest in crude oil market with high ROI through the following ways:
Exchange traded funds (ETF) gives access to different assets while increasing your portfolio.
To get started, you need to study the market and how ETFs respond to market conditions. When you are able to understand how ETF and how it will affect your taxes, you are free to invest.
Through oil futures, you can also make returns through oil and gas. Oil futures are highly prominent in the market, making them very liquid and accessible.
Futures are a way for a producer to lock in the price of what they are selling in advance — and for the buyer to lock in the price of what they are purchasing. It gives the shareholder right to buy oil at a set price by settlement date.
Simply put, oil futures are contracts in which two parties agree to exchange a set amount of oil at a set price on a set date. When you trade futures, you’re actually trading the contract itself, not the oil or the commodity. If the price of oil rises, the contract may become more valuable and the owner of the contract could sell it for a profit. If it falls, the contract could lose value and, in turn, the owner could lose money when selling.
This is also known as direct participation. With this, you can buy Interest or assets of an oil company. Actually, you can gain the benefits of owning a portion without getting involved with operations.
You can earn passively using DPP as it is of several types.
And they are:
- Exploratory drilling program
- Developmental drilling program
- Work interest program
How To Make Profit In Crude Oil Investment
Crude oil offers a whole lot of opportunities especially in the world’s economic system and to make a profit, you need to understand the steps below
Understand what makes oil work
Just like any other product, crude oil deals with buying and selling. When the supply overshadows demand, it can take a twist. Therefore, to make a profit, you need to know when the market goes up and down.
Select your trade market
When you start investing in oil, you will understand you have two(2) markets to select from. The West Texas Intermediate (WTI) and Brent crude market. The WTI gets its oil from the Basin field of the US and the Brent gets its oil from North Atlantic.
With this, you will understand the different markets and products. And however, if you have done your research, it will be easier to choose the right market.
Know your crowd
Most times, retail trades can affect the oil market. This emanates when there is a trend on oil however leading to some individuals trying to invest. However, this can impact your profits. But when we have many investors dropping money on the stock, it usually collapses.
As an investor, you need to understand the subsequent waves of greed and fear and how it affects the market.
Investing in crude oil is one way a lot of investors are earning big in the field. It is considered the trader’s delight as its volatility gives rise to major moves.
Many have described it around the world as black gold. Definitely, it’s a natural product that through research can’t be replaced soon with any other product.
With the world’s economy depending heavily on its distribution, crude oil stands as the world’s black gold as it drives economic growth across developed and developing economies.
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