Oil touches everything in the world economy. Products or goods made from petroleum are countless. Look around your office and home, as almost everything you see includes petroleum. Oil is regarded as life source of the world economy. Without it, the world economy collapses, just like living beings without water and air.
Crude oil drives the oil stock prices. Massive production has led to decline in oil prices to more than 50%. The reason for collapse in oil price is simple. The supply is more than demand, which has forced the oil companies to cancel, or delay projects. Lack of new oil drilling projects in US will, however eventually affect the supply. This dilemma will take time to resolve, because to start drilling holes in the ground for oil search takes time.
Eventually, the ratio of supply and demand will get adjusted, and the oil prices will swing back. The demand will dominate the supply, and oil prices will again rise high.
Price disturbance is common in commodity market, which creates risks and opportunities for investors. You can take advantage of these circumstances and invest in oil trading.
Buy oil futures
The direct way to purchase this commodity is to invest in oil futures. Approach a commodity broker and buy a contract, and purchase oil for a future date & price per barrel.
Risk of buying oil future contract is a NO for many traders, because you need to be accurate about price movement and its timing. It makes sense, if you are hedging oil price movement as an insurance policy, on other oil stock you own.
Buy oil ETF
Buying ETF, which invests in oil, can be a good option. ETFs trade on major stock exchanges, so you can buy it quickly and easily from online brokers. The big issue is that these ETFs don’t follow price movement of the underlying commodity. These funds are used to buy future contracts. Just like how you invest in mutual funds, there is the issue of expirations and creating new contracts at current market price. ETF is fine for quick commodity trade, in and out. Holding ETF for long term is not recommended.
Buy oil company stocks
Buying shares of popular oil companies is another way of taking advantage of oil price fluctuations. You can pay a nice dividend and buy it easily from the market. As you wait for stock price to rise, and if the oil prices bounce back, the company pays a nice dividend. You get paid, but dividends are not guaranteed. Moreover, you feel at ease of owning good oil stocks that are predicted to rebound.
Master Limited Partnerships or MLP’s are another way for investing in oil and gas stocks for long term. You don’t need to be concerned about expiry of future contracts. These companies own the oil & gas pipelines that transport the commodity, all around the country. An attractive dividend is provided, and you can buy it from a financial advisor or online brokers. Several mutual funds invest in MLPs, which can offer more diversification.
Contracts for Difference or CFDs are probably the best way to hedge the falling prices, and are handier as short term trades. Here you can make money on leverage, even on the falling markets, as long as you predict the right direction.