Investing in oil and gas is extremely lucrative if done intelligently although dramatic price fluctuations can be very misleading for both veteran and amateur investors. Foremost is to decipher the forces driving the oil markets and how you create a secure financial stake in oil and gas for your investment portfolio. This blog post provides a perspective on becoming a successful oil and gas investor.
Decipher the Effects of Demand and Supply
As a commodity, the fluctuation in oil prices majorly depends on the forces of demand and supply. When oil prices rise the demand decreases in the US. However demand increases in emerging economies since they are still industrializing, and oil is a catalyst for economic growth. On the supply side, the budget for oil exploration has been cut hugely, which has led to a fall in the number of new reserves found since 2014. Most OPEC nations don’t have the needed capacity to pump increasing amounts of oil. The decreased production means decreased supply, triggering price hikes in the oil markets. So, these forces of demand and supply should be understood when making oil and gas investments.
Watch Out For Oil Price Speculations
In addition to demand and supply, there are additional factors that have effects on the prices of oil. For instance, investors speculate on the impact of oil futures contracts on prices of oil. At the same time, political and global events can also lead to fluctuations in oil markets. For example, during the COVID-19 pandemic and economic recession, oil prices collapsed because demand dropped.
Find Out the Quality of Oil
Many people may be unaware but crude oil differs in quality. Sweet crude is the most preferred quality by refineries since it is easier to refine by stringent environmental standards, especially in the US. This also leaves an impact on the prices of oil because U.S is compelled to import oil notwithstanding oil production is rising in the local market. Moreover, based on the location where the oil is being pumped the quality can differ. The oil pumped in Texas, Louisiana, and North Dakota is light and sweet crude, making it ideal for refining into gasoline.
Explore Different Oil Investment Options
Notwithstanding the forces impacting oil prices in the markets, there are various options when choosing to invest in oil markets; and make a profit from fluctuations in energy prices. It is possible to do bulk oil trading in derivative markets using futures and options contracts. However, it would not be a good idea or practical for individual investors. There are many other options to include oil and gas investments in your investment portfolio. One simple way is by buying stocks of drilling and service companies. You may invest indirectly in oil by purchasing energy-sector ETFs. Another option is energy-sector mutual funds that mainly invest in energy-related stocks.
The Bottom Line
Same with other investments it is recommended to do your research and consult an investment service that specializes in helping investors, with an interest in oil and gas investments achieve their investment objectives.
