Learning How To Invest in Oil

[Posted on August 20th, 2014 by Michael L. F. Slavin]

Investing in oil is an idea many investors toy with. It’s an attractive option because of its lucrative potential. Still, the majority of people aren’t sure exactly where to get started; they continue to wonder how to invest in oil rather than take action.

Oil Investment Options

Understanding how to invest in oil begins with understanding your options; you may have many questions as to what they are. There are several different ways a person can capitalize on the oil industry. For instance, an investor may invest in the stocks of oil drilling and service companies or they may want to learn about the sector mutual funds that concentrate solely on energy-related stocks. They may also invest in actual land or drilling areas.

People can, likewise, invest through either an exchange traded fund (or ETF) or an exchange traded note (ETN). These allow you to invest in oil futures contracts as opposed to energy stocks. But, even these aren’t always straight forward; they offer a myriad of options including single commodity ETF, multi-commodity ETF, and several energy commodities.

Investors may also be interested in joint ventures, a process that merges leaders of the industry to allow investors potentially large returns, monthly income, the ability to hedge against the world economy, and long-term pay.

Why Oil Investment Pays

America consumes 18.8 million barrels of oil per day. In other words, oil is a product that is greatly in demand (the soaring gas prices are enough to demonstrate that). Still, like all investments, oil isn’t always a sure bet: if it were, everyone would invest.

Rather, investors need to be prepared for fluctuations – oil appreciates over time, but that appreciation isn’t always a consistent surge. Often, this is tied to seasons; the price of oil may drop slightly after peaking during the travel-filled summer months. That’s why oil investors should have a portfolio that is well-rounded, one that doesn’t solely rely on the energy sector. This will help them better sustain the drops.

If investors are willing to put up with oil’s fickle nature, then investing can be quite lucrative. This is especially true for long-term investors.

The Tax Benefits of Oil Investing

Not only can oil investment directly put money in the bank, but it can also indirectly save on taxes. Tax law specifies that a working interest in an oil and gas well is considered active income (as opposed to passive) and can be used to offset against other forms of income (such as salaries).

The drilling equipment used for oil investing – as well as labor, chemicals, and other miscellaneous items – are also 100 percent deductible.

According to the Texas Energy Group, direct income made from oil investment is also privy to tax benefits. The Percentage Depletion Allowance of the tax code allows 15 percent of gross income from oil and gas properties and investments to be tax free. This means that if a property makes 2 million dollars over the span of a year, 300,000 of those dollars will not be taxed.

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