How Can I Invest in Petroleum…Let Me Count the Ways

Petroleum could be the world’s most important commodity. Petroleum is refined into fuel for all types of transportation and its byproducts even used to manufacture plastics and chemicals too. As diverse as its many end products, so are crude oils investment opportunities.

Time to Invest

 

Investing in the Price

One way you can invest in crude oil would be by investing in Exchange Traded Funds (ETF). These tend to be mid to long range investments that track the yield and return of its native index. Currently they do account for 1.34 trillion of the 14.72 trillion in total assets being held through investment companies with a majority of this share being in mutual funds.

The goal of the ETF is to provide investors with a benchmark return for a minimal cost and usually commission free. These funds move up and down in value and also track the spot price of the petroleum. Crude oil ETF’s currently trading on US Stock Exchanges use the value of West Texas Intermediate Light Sweet Crude Oil as their benchmark.

On the flip side one should also understand that there is also an inverse ETF. The inverse ETF works the same way as the previously mentioned ETF only these are used to bet against the markets and its declines allowing one to profit from falling oil prices. To find these look for “short,” “bear,” or “inverse” in the name.

 

Trading the Swings of Crude Oil

Trading short term swings in the price of oil is done through the investments in futures. These typically require a marginal deposit between 5 and 10 percent the value of the actual future contract. Often these investments provide bigger profits on smaller moves in the price of oil. These trades do require a Registered Commodity Futures Broker.

 

Exploration & Production

If energy exploration and production sound appealing to you, there are stocks trading that are directly affected by the price of the oil. “E&P,” as they are referred to drill for the oil and when successful earn huge windfall profits.  These same companies often increase profits and shares prices when oil is moving slower to keep their investment opportunities appealing. These companies range from smaller region specific options to large companies with worldwide sites looking for new oil.

 

Crude to Fuel

There another option after you’ve gotten it out of the ground and even after it’s sold, that’s transporting and refining.The industry has termed “upstream” when speaking of production, “midstream” when you are talking transporting and “downstream” when it comes to the refining and marketing of the product.

There are companies who focus on each of the 3 parts of stream and others who cover all 3. The ones who encompass all 3 are energy giants like Exxon-Mobil, Chevron, BP, and Royal Dutch Shell. These investments tend to cling to old investing concepts and often have the most dramatic swings and shifts.

 

Where to Get the Funds to Invest

Energy in general and oil and gas specifically is a robust sector for investment of retirement dollars. If you’re saving for the long haul, you can juice your returns by diversifying into these sectors. One common way to do that is with self-direct retirement funds such as a solo 401k. That’s one way to both diversify your retirement portfolio and easily participate in a sector that isn’t just standard Wall Street investment instruments.

Randy Johnson
 

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