Oil is a difficult investment to justify. It seems that the price fluctuates all the time, and oil prices depend on many different national and international factors, so investing in oil exposes you to a lot of different risks. In this guide, we will explain how investing in oil can be a good idea, and lay out some unconventional ideas for how to do it. Oil can scare people off because of the way it tends to move, but a person who is in the right position for oil and knows about the industry can do well.
The Demand Is Always There
It is true that the price of oil is subject to fluctuations. International instability in the Middle East and Eastern Europe can affect how much oil from suppliers in those areas reaches the market. Changes in how consumers in China and the US buy cars affects the demand for oil all over the world. Airline crashes can make people fear flying, lowering demand from airline carriers.
All of these factors can and do affect the price of oil, but there is one underlying fact that will cause oil to retain value. It is still a crucial input in many industrial processes. Fuel and the synthesis of plastics depends on oil, now and for the foreseeable future. The importance of oil as an input means there will always be demand for the commodity- it has inherent value.
There Are Many Opportunities
There is a lot more to investing in oil than just, well, buying oil. Oil companies and the commodity itself are the most obvious ways to get into oil, but there are numerous other opportunities. For example, consider the case of pipeline pigging companies, like Inline. They do support service for oil companies, and their value depends on how much oil infrastructure there is. It is less susceptible to random oil demand fluctuations than stock in oil companies or oil itself. There are lots of similar opportunities for companies that do business-to-business support services for oil companies. Think about like this. You can invest in a gold mine, that may or may not have gold in it, or you can invest in the company that sells shovels and hard hats to the miners. The risk profiles are not the same.
The age-old adage of buy low, sell high works in oil as well as anywhere else. Now, oil prices are at historic lows, and they are predicted to remain depressed through 2015. That is not a guarantee, but oil is cheaper now that it has been in a while, and it will take a while for it to regain its old peak. It is certainly much better to get into oil now than in the summer of 2008, for example. It is not clear how oil prices are going to move in the near future, but it takes several months for oil suppliers to adjust to new prices. That means that they will keep pumping oil for a while. That, in turn, implies that oil prices are going to remain low- suppliers will not be able to cut back on what they are producing immediately.
Oil is a volatile commodity– no one denies that. If you take a look at the recommendations we outlined here, though, you stand a better chance at taking advantage of oil’s current low to do well with it. Keep in mind that investments always carry risk, and nothing can guarantee the return of any particular strategy. The oil industry has a lot of opportunities for people who are willing to look for them. You need to know how to exploit the unique structure and importance of the oil industry.