Oil Investing Tools – What Strategies Are Right For You?

Posted in Market Research by on November 23, 2016

Smart investments should always begin with a strategy, even if it’s unsophisticated. Investment strategies should not be treated like a gamble in Vegas. Blind investing in the oil market very rarely results in success, so a plan is imperative and understanding what oil investing tools are available is a must. Whether it’s a long-term investment or a short-term investment, you should have a strategy in place. Realistic timelines and calculated risk levels are a good basis of any oil investing strategy.

Knowing oil trading basics and understanding the specific terms associated with oil trading gives investors a great baseline for jumping into the oil investing world. From there, traders can grow and develop their understanding of the market and begin to make more complex investing decisions.

Like most individual investors in the global market, you probably aren’t looking to buy actual barrels of oil. More likely, you are looking to earn a reasonable return on investments. This could be through investing in oil futures, purchasing oil ETFs or through direct investment in oil companies. Each method of investment has its own benefits depending on what you are looking to achieve.

It is important to always remember that in times of market uncertainty, you should carefully assess the potential risks and benefits before making major decisions. Unless there is a true fundamental change in supply or demand, most market swings revert to the mean over time.

Oil Investing Tools – Exchange Traded Funds

Oil Exchange Traded Funds, or ETFs, are probably the simplest way to invest in the oil market. You have one of two options with ETFs:

1. Purchase an investment that tracks the index of a basket of stocks, similar to a mutual fund

2. Purchase an investment that owns real oil futures

The great thing about ETFs is that you can gain exposure to the oil market without having to directly own equity in it. This is great for smaller traders and those of us who don’t actually want to own the oil, we just want to make a smart monetary investment. It gives access to the ups and downs of the various segments of the oil market without being bound to individual companies and stocks.

Oil Investing Tools – Options

Oil options, in their purist form, are designed for buyers who will actually use the product. However, many investors use these investment tools to earn profits from volatility. When selecting an option you pay a premium to have the choice, but not the obligation, to buy or sell the oil commodity by a certain date at a fixed price. If market conditions are favorable you buy (or sell, depending on whether you are short or long) and can immediately realize a gain. If market conditions are not favorable to your position you can simply let the option expire and you only lose the premium you paid.

Oil Investing Tools – Stocks

Purchasing shares in oil companies is a common practice for many investors. It’s easy to access through virtually any broker and it’s highly liquid, so you can buy and sell at any time. Owning stocks in companies in all areas of the oil industry is a great way to tap into the market while still remaining diversified. For example, you could purchase shares of a major refining company, a firm that executes large CAPEX projects like building oil rigs, and also invest in a company that stores and transports oil.

Believe it or not, each piece of the oil industry behaves differently, so while one may be struggling in the global market another could be booming. This provides oil investors an excellent opportunity to diversify and gain access to potential profits while minimizing risk.

What’s the Right Move?

That is quite literally the million dollar question. The right decision depends on timing and risk level. If you are looking for a highly liquid, mid- to long-term investment then stocks are a great choice, while ETFs would steer you towards midterm, arm’s length investments. If you are looking to take advantage of short to midterm arbitrage and are willing to accept the risks that come along with market speculation, then options could be a smart investment.

With the right tools and the right understanding of each investment type you can create an oil and gas investment strategy for any type of market condition.

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