[Posted on March 2, 2015 by Michael L. F. Slavin]
Because of the current oil price war going on between OPEC and non-OPEC member nations, many investors often wonder how to invest in oil. There are a number of different ways, each involving a different level of investment of money and time. While buying into oil ETF’s for example, is easier than direct investment, the returns are considerably lower (as is the risk).
1. Oil ETF’s: Buying in By the Barrel
The easiest and most indirect way to buy into oil is through an Exchange Traded Fund (ETF) for oil. These funds are traded on the NYSE, and the price of a share equates roughly to the price of ownership of a barrel of oil. A number of oil- and energy- related funds exist for purchase, such as U.S. Oil. In addition, one can buy even more indirectly through energy ETF’s. These funds allow you to invest relative to the total price of oil and energy reserves. For those looking for information on how to invest in oil, these mutual funds are the lowest-risk option in terms of energy investment, as they do not relate to specific oil and energy firms or their relative success.
2. Oil Company Stocks: Investing in Companies
While Oil ETF’s are best for new investors who are basically following the price of oil, they are far from the most profitable. Because certain companies will produce more than others, investing directly into oil companies is a bit more sophisticated a method of investment. There are a variety of oil companies, both domestic and foreign, which are actively traded on stock exchanges. Of course, because you are no longer investing on general output but a company’s specific production, your investment is somewhat riskier in a harsh climate as is current in the short term.
This method requires considerably more study and analysis concerning which companies have a strong rate of growth versus which are in decline. The largest players in this field can produce decent returns, but it’s important to analyze how they are reaching their share price and whether their methods are sustainable. Usually a decent prospectus and analysis of stock performance is sufficient to determine a stable investment.
3. Direct Investment: Getting in On the Ground Floor
A somewhat less common, but well known, way to invest in oil is direct investment in oil wells through either shares or a joint venture. This is by far the riskiest proposition (and usually involving a higher level of investment), but investing in a successful well is easily worth the cost, and a select number of firms specialize precisely in direct oil well investment. Not only is the informed investor given a share of the profits, they are personally invested in the success of the oil venture and are kept “in the loop” on how their investment is actually being used.
Such direct investment has both tax and profit advantages, but it is not as simple as buying shares, and an investor should ideally be better informed than the above two options. That said, direct investment in an oil well will, by far, exceed the returns of less risky investments. Investing directly involves money, time, and knowledge – but with experienced guidance and some decent research, it’s easily the most profitable of the three methods listed.