Whether you love the idea or not, ever since the first oil refinery opened in Baku in 1837, oil, or ‘black gold’ as it is known, has been one of the world’s most valuable and versatile commodities. Crude oil is used for the production of so many everyday essentials, from fuels like diesel and petrol to many types of plastic and even the production of clothing and furniture.
The price of oil increases in line with demand, therefore when demand for oil and petroleum based products is high the value may rise as consumption increases.
The United Arab Emirates announced in February this year that it is planning to pump further investment into petrochemical and refining projects in India. Sultan Ahmed Al Jaber, CEO of Abhu Dabi National Oil Co. and Minister of State for UAE is aiming to develop a strategic partnership between the two countries and is planning to store more crude oil in India’s reserves. Wall Street is predicting a recovery in oil prices this year too so how do investors capitalise on this market growth, while minimising exposure to risk? There are several routes to investing in oil.
- Buy oil
You could buy barrels of oil to store and sell on in future, however for the majority of investors this is not practical. Oil storage and handling is not easy, as it is toxic and highly flammable. Most people would not have the right facilities to store it and would have to pay somebody to do this for them, which could cancel out the return on investment.
- Futures Contracts investment
You can buy a futures contract in crude oil, meaning you don’t own the oil physically, but if you buy a contract and the price of oil increases in the future, you will make money, and if the value drops, you will lose out.
- Buy stocks in oil companies
You may consider purchasing stocks in oil production companies, or those that sell crude oil or transport it. Investors need to understand the markets though, as depending on which companies you invest in, some companies will rise in line with the price of oil, and others could actually fall. For example, refined oil products such as fuel depend on oil for production. If the price of oil increases, but the price of petrol doesn’t, this squeezes their profits, and drives their value down not up.
- Invest in ETFs (Exchange Trading Funds)
These funds enable you to invest in a particular commodity, such as oil, and some will expose investors to the rise and fall of oil’s value. Their performance can be tricky to predict, so it is important to understand how they operate, and be aware of potential losses. The United States Oil Fund is the most well-known Oil ETF, but there are many others so it’s important to do some homework before investing.
The IEA (Institute of Economic Affairs) predicts that global demand for oil will not peak until around 2040, as growing economies such as China and India increase their demand for crude oil. With this in mind, those who want to invest in oil might not want to leave it too long. The potential gains could be significant, and much like oil itself, the market can be volatile, so do your research thoroughly before investing.
