The last 3 years have volatile for black gold, which is how most analysts and experts call this commodity. During the first half of 2019, we see the commodity is rising up again with a price of more than 60$ per barrel.
If you think that investing in oil is buying a couple of barrels and selling to the locals, then you should read this article carefully. Yes, you might become an oil tycoon but how much money is that going to cost? There are other ways to invest in black gold.
Why Invest In Black Gold?
Before we list them, let's take a look at some of the reasons why you should invest in oil.
Low Price And Growth Potential
One of the reasons is the current low oil prices. This is always a signal to investors that sooner or later the price will start going up. Buying oil at this low price could be a good long-term strategy.
Decreasing Oil Supplies
Oil supplies are decreasing. Oil is a non-renewable source of energy, so it means that over time the supplies will be exhausted. When you apply the simple rule of supply and demand, it's logical to conclude that prices will start increasing.
Cuts In Production
In May 2017, OPEC and non-OPEC countries hammered out an agreement to extend the cuts in oil production for 9 months until March 2018. This is an attempt to spur the price of crude oil.
Liquid Commodity And Stocks
Crude oil is the commodity which is most actively traded. In addition, oil stocks are also some of the most liquid assets out there. If you are already an investor, you know how key liquidity is when we talk about trading.
The Most Popular Ways To Invest In Crude Oil
Now you know some of the reasons to invest in black gold. Which are the most common ways to do so?
Buy Oil Stocks
Similar to gold investment, one of the best ways to invest in oil is to buy shares of companies that produce the commodity. Again, it's a very simple and easy method to participate.
Why is this a good option?
Well, as most probably you know, companies pay their shareholders dividends. So, you can have a nice profit out of your oil stocks. While waiting for oil prices to go up, you can easily enjoy the dividends these companies pay.
Even though there is a strong correlation between the price of crude oil and oil companies shares, things might be a little different.
Big companies and business do so many things that crude oil price is just one part of the whole process. You have to follow the company's overall performance as well as oil price.
Invest In Oil EFTs
Exchange traded funds (ETF) are very similar to index mutual funds and offer one of the most accessible and affordable options. You can easily purchase shares of ETFs and join the game. This is a very quick and simple way to become part of this dynamic industry.
Just like index mutual funds, ETFs track the performance of major indexes. These funds offer their investors the chance to own oil stocks, futures and derivatives. These assets are traded on most stock exchanges.
Perhaps, one of the best oil ETFs is the United States Oil Fund. It tracks oil prices on a daily basis but, unfortunately, it doesn't track price movements in the long-run.
Purchase Oil Futures
If you don't want to literally buy barrels of oil, you can purchase some oil futures. These are contracts between you as an investor and a broker, to sell or buy the commodity.
How It Works?
In this agreement, the price and the date of the deal in the future are set in advance. Since the price of oil is extremely volatile, the leverage is really high – something between 5-10%. However, it could mean both profit or loss. So, it's a double-edged sword.
Usually, futures contracts require a profound knowledge of the financial sector so they are not recommended to newbies.
Invest In Oil MLPs
This is yet another way to take advantage of investment in black gold. Unlike investing in EFTs, this is a long-term investment strategy.
MLP stands for master limited partnership and these companies have two types of shareholders: general partners and limited partners (investors).The former are the people who run the business and the latter are the investors who purchase company shares.
These companies can come up with some attractive dividends and potential for capital gains.
Own Crude Oil
This is the most inefficient and expensive way to invest in oil. Owning crude oil is no easy task since it's time- and money-consuming. You need to store it somewhere under special conditions.
Besides, you have to invest in suitable facilities and equipment needed for the process. And given these inconsistent prices – it's very, very risky. When you have the other four options, this one almost looks like a joke.
Whatever we say about oil, it won't be enough. When you look around, you can see that it is virtually everywhere.
Why not invest in it and take advantage of the future of the energy sector?
Besides physically buying oil, you can invest in this commodity effectively and efficiently in different ways. They include investment in oil EFTs, buying shares, investing in oil futures and MLPs. Each one of them has their benefits and downsides. You are the one to make the final decision.
The Smart Investor content is intended to be used and must be used for informational purposes only. We are not an investment advisor and you should NOT rely on this information to make investment decisions .