[Posted on September 10th, 2014 by Michael L. F. Slavin]
Oil and natural gas continues to rise in demand all across the globe; urbanized countries rely on it to keep their infrastructure functioning fully. It is this growing need which makes oil investing appealing to the market watchers. Would-be investors should have an idea of why oil is such a rewarding investment option, as well as understanding who to trust along the way.
The Demand of Oil
The law of supply and demand dictates that things in great demand and short supply are more valuable than those in high supply and low demand. Oil, because it is in shorter supply and extremely large demand, ends up being quite valuable. According to the US Energy Information Administration, one of the things driving this demand is the urbanization of third-world countries. Countries that are not necessarily third world, but growing nonetheless, are also driving forces. China, in particular, is expected to be one of the biggest factors in consumption growth. This makes oil investing an appealing option which is continually growing in value.
The Investment Options of Oil
One of the biggest advantages to oil investing is that it offers an array of options. To begin, some investors explore purchasing stock of oil drilling and service companies; this manner can offer monthly-based, potentially high income returns. Investing in energy-related stocks is another way to go as is investing through sector mutual funds.
For those looking for a more direct approach, exchange-traded funds and exchange-traded notes allow investors to put money into oil future contracts rather than energy stocks. These investments are typically uncorrelated to either stock market returns or the value of the US dollar. This gives investors the opportunity to invest in something that follows the price of oil more closely. Investing this way can also provide a hedge against other investments as well as portfolio diversity. Investors who want to go the route of the exchange-traded funds or exchange-traded notes have several options. Some of these include single-commodity ETFs (such as oil, only) or multi-commodity ETFs (such as oil, gas, heating oil, and natural gas).
Benefits and Advantages of Oil Investing
Oil investing can offer many benefits and advantages. First of all, there is the potential for very large returns as well as income dispersed on a regular basis. Another advantage is the tax benefits: fifteen percent of the profits from oil investing are tax deductible. This means that an investor who earns 100,000 through oil investing won’t have to pay taxes on 15,000 dollars of those earnings. Drilling equipment, including the actual equipment as well as the materials required to run it, is also tax deductible.
Oil investing gives people the chance to hedge against the world economy as oil is typically immune to what the rest of commerce is doing; even in a deep recession, oil is still needed and, therefore, still purchased. Oil investing, likewise, allows people to make money continually after an initial investment.