Oil Price Investing: 4 Factors to Consider Before Trading

Oil prices are always going up and down, and there is consistent talk of emerging energy alternatives that are going to change the world. But the fact is that energy, and in particular, oil is the most profitable sectors for investors. Any wise investor knows that oil price investing is key to a well-rounded financial portfolio.

While wind power, coal, and solar energy are important parts of the energy industry, oil continues to be one of the top performing investments out there. Why? People need oil to function in their everyday lives. The U.S. alone consumed about 913.3 million metric tons of oil in 2017.

In addition, the oil and gas extraction industry has a net profit margin of 16.4%, making it the third most lucrative industry in the United States. That number will only climb, as America continues to increase its investment in the production of shale gas and oil.


If you want to pursue oil price investing, you first need to do your research so you know you’re making a smart financial decision.

Here are four factors to consider before you begin trading.

1. You Need to Determine What Type of Oil Price Investing to Utilize

There are many ways you can do oil price investing. They include:

Oil Stocks

These are stocks for the companies you’ve likely frequented at the pump like ExxonMobil, Chevron, BP, Royal Dutch Shell, and Hess Corporation, as well as businesses like Apache Corporation, Petrobras, Devon Energy Corp, and Newfield Exploration. To invest in them, you can research what price they are currently trading at — for example, Chevron is currently $117.51 a share and Devon Energy Corp is at $37.08 a share — and then decide how many shares you are going to purchase.

Oil Futures

Another way to dive into oil price investing is through oil futures. You can buy oil commodity futures on the New York Mercantile Exchange. These are riskier investments and you need a large investment to get into the market. Typically, you’ll succeed with these investments if you follow the oil commodity futures market carefully and can predict oil price patterns over time. A high volume is traded on a daily basis, and you can make a huge profit if you know how to correctly play the market.

Master Limited Partnerships

When it comes to oil price investing, Master Limited Partnerships are like stocks, except that you don’t get any input as to how a corporation is being managed and operated. You are a limited partner, however, you still get to reap the benefits of making money if the stock does well.

Exchange Traded Funds

An exchange-traded fund, which is an investment fund that is traded on the stock exchange, is another way to get into oil price investing. It is also one of the easiest ways to get started and carries much less risk that oil futures. ETFs, which include United States Oil Fund (USO), Invesco DB Oil Fund (DBO), and ProShares Ultra Bloomberg Crude Oil (UCO), are a combination of oil futures and oil stocks. Shares are generally less expensive. USO is currently trading around 15.19 a share, and DBO is at 13.30. Some provide dividends while others do not. With ETFs, you’ll have a more diversified oil price investing portfolio and you won’t be putting all your eggs into one basket.

2. You Must Do Your Research on the Best Oil Stocks to Purchase


Now that you know all about oil price investing, you can determine which way or ways you can begin to bulk up your oil portfolio. If you decide to invest in oil stocks, you will need to thoroughly investigate the companies you’re going to be buying shares from.

Along with looking at reputable websites and learning from experienced energy investors, you should research the oil companies’ revenue, net income, how much debt they are carrying, and earnings per share. You can also dig deeper into the technologies the companies are using, the access they have to oil, what regions they are in, who is on the executive team, how natural disasters have affected their operations, if there have been any controversies (like the BP oil spill), and their reputation over the years.

Do not just invest based on emotions or brand recognition, because companies you may have never heard of might be making a big splash in the world of oil. Research many of them before making a final decision, and don’t be afraid to try another company if your first isn’t performing as well as you expected.

3. Oil Can Be a Volatile Market

Oil prices are never 100 percent stable and secure. One minute, you may go to the pump and it’s $2.50 a gallon, and the next, it jumps up to $4 a gallon. In 1973, 1979, and 1991, the price of oil jumped and created a panic throughout the U.S.

Sometimes, volatility is caused by wars or political happenings, and then oil production is switched off. This has happened in countries that are part of OPEC and control 40 percent of the oil in the world. Politics and natural disasters also affect oil prices. For example, Hurricane Katrina and the Mississippi River flooding both contributed to changes in oil prices.

To combat volatility with oil price investing, you should go for a stable ETF as opposed to oil futures, unless you have deep knowledge of the market. You can also invest in companies that don’t rely entirely on OPEC and are doing innovative drilling and extraction techniques that tend to be more reliable. No investment is ever a guaranteed home run, so there is no need to panic if your oil investment drops at certain points. It will be likely to bounce back in no time.

You Need to Stay on Top of Oil News

If you’re going to pursue oil price investing, you have to be committed to following oil news. Along with looking at reputable websites like CNN Money, the Motley Fool, Bloomberg, and CNBC on a regular basis, you should subscribe to daily news reports from experienced energy experts and investors.

Keep in mind, however, that you shouldn’t react with haste if bad news is on the horizon. And overall, thankfully, the oil and gas industry has been stable in 2018. The U.S. daily rig count is on the rise – in one month, it went from 1114 on July 21, 2018, to 1133 by August 20, and it is likely to keep going up as we inch closers towards 2019. In addition, U.S. crude exports along the Gulf Coast of Texas was higher than imports this past April, and natural gas production in the Haynesville Shale basin reached its highest point since 2012.

While there have been sanctions on Iran, and OPEC has seen some instability, these factors have yet to have a huge impact on oil prices. OPEC is getting its inventories back to a normal place by draining over 150 million barrels out of the world’s stockpile as well. OPEC is also dedicated to complying with the production reduction agreement.

In terms of U.S. production and oil price investing, producers are sending more cash to their investors through stock buybacks and higher dividends instead of giving money to drill more wells. The result is a higher demand for oil than predicted – the International Energy Agency (IEA) predicted that demand will be at 1.4 million BDP, which is well above initial estimates of 1.3 million BDP for this year.

The truth of the matter is that any type of investment has its ups and downs. Just look at what happened to Facebook’s stock in the summer of 2018. At the end of the day, oil will be a solid investment for years to come, until some big energy disruptor comes along and changes the game. For now, your money is safe in oil, as long as you conduct your research, do the right type of oil price investing based on your personal investment needs and keep on top of the latest in oil news.


If you’re ready to get started with oil price investing and want to stay on top of all the latest in energy news, subscribe to Energy Advantage today. You’ll learn what oil trades to look out for and how to grow your wealth exponentially through the energy sector, even in times of volatility.

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