Investing in Oil

Ways of investing in oil


Investing in oil and gas has a lot of upside potential.  However, it can also be an extremely volatile sector.  One of the more stable investments you can make is a large cap exploration and production company.  Many of these types of stocks offer attractive dividends coupled with potential long term growth.

A riskier way to play the energy sector is by investing in junior companies.  Many of these are only in the exploration phase so aren’t producing any income.  There’s the potential for many of these junior oil and gas companies to appreciate a lot and thus realize substantial capital gains.  What makes investing in these juniors so potentially lucrative is the price of their barrels and the ground.  Many juniors just starting to produce will have proven reserves as yet to be exploited. Once they start to produce they can quickly add value via earnings.

Yet another way of investing in oil and gas is with energy ETFs.  These ETFs are designed to closely track various commodities. This is a fairly low leverage way of investing in oil it may however, have less risk. Your only real concern is then the oil price unlike a stock where you have to worry about the oil price and, the company’s prospects.

Higher leverage ways of investing in oil

Anyone who has been involved in trading any kind of stocks, futures or options knows the allure of increasing leverage. The financial markets offer many opportunities to vastly increase your wealth in a very short period of time. Seasoned investors also realize that higher leverage can be a double edged sword. This also holds true when investing in oil. Risk must be assessed before committing to any position long or short. A bad play on a highly leveraged position can destroy your capital in very short order.

For investors looking to reap large gains on oil a position in options or even futures maybe the way to go. When considering using future contracts to invest in oil you need to consider that the commodity exchanges have been raising margin requirements a fair bit over the last few years. Most commodities have experienced very large swings in value. This trend is likely to continue. Even if you are right about the general direction of oil you need to have the margin to stay in your position. Committing a smaller portion of your portfolio to investing in oil is probably the most prudent route to go. If you cannot afford a full size oil contract there are mini contracts available.

Another popular way of investing in oil is via put or call options on a certain stock. Many option contracts on the larger oil companies are very liquid so the spreads shouldn’t be too terrible. The main advantage of using options over futures when investing in oil is your very limited risk. In the event that your timing is way off and your options expire worthless your only risk is the option premium. Whereas with future contracts you have to keep coming up with maintenance margin if the market moves against you and, you don’t close out your position.

The ideal time to be investing in oil

There are two main factors right now that could potentially drive the price of oil.  On the one hand we have the European debt crisis which could spur a global rout from commodities.  This could potentially cause a precipitous drop in the oil price similar to what we saw in late 2008.  I do believe the selloff in 2008 was overdone which it as evidenced by the markets quick recovery crude oil price.

On the other hand we have an extremely bullish scenario for crude oil prices.  Currently there is mounting pressure on the Iranian government to cease and desist with its nuclear program.  The western powers insist that they are trying to develop nuclear weapons while, Iran insists their program is for purely peaceful purposes.  My purpose here is not to figure out which of these opposing factions is correct.  Within the scope of this article we are concerned with how this could potentially affect the crude oil price and, people investing in oil.

At this Point there are two potential outcomes from the Iranian issue; a) the American sanctions go through removing the lot of Iranian Oil from the market or, b) there is a conflict.  Either the scenarios will remove oil from the markets and increase the price of crude oil.  My point with highlighting this current situation is to show there are a lot of external factors that can influence the oil price.  I’m sure going forward geopolitical factors will be very important when investing in oil.

Regardless of your own personal opinion on the direction of the crude oil markets there promises to be a lot of price movement. For this reason alone investing in oil promises to offer a lot of opportunity.