With all the turbulence in the oil markets following Hurricane Katrina and the more recent political problems with Nigeria and Iran, many investors are wondering whether they should put some money into oil. Of those investors, many decide after doing some research that the answer is a resounding yes. But that is about as far as they get.
The number of ways to invest in oil is staggering, reflecting petroleum's deep integration with many facets of our economy: industry, transport, power generation, food production. Let's take a look at a few of the more common ways investors can get started in oil.
Managed Funds For Oil?
One of the simplest ways to entangle your money with oil is to select a mutual fund that specializes in it. Areas of specialty differ, from the relatively high-risk funds that invest in exploration for new oil deposits to the relatively conservative funds that deal directly in oil company stocks.
The real advantage of this method is that you can get detailed information before throwing your money in, by contacting the fund you are interested in and requesting a prospectus. Inside you will find analysis of the fund performance in relation to benchmark funds, and general information about the fund's philosophy and investing style.
What About Individual Stocks?
The number of major oil companies has been dwindling as diminishing oil reserves are bought out by the remaining giants. If you have any doubts as to whether oil production is in decline, consider British Petroleum - which no longer exists. They changed their corporate name to Beyond Petroleum. Clearly, they see an end to the current energy market somewhere in the future.
So, if there are going to be shake-ups in the oil market you should avoid putting your money in right? Not at all. In fact, as a result of Hurricane Katrina most oil companies pulled in record profits. The demand for oil isn't going anywhere, and if production declines the oil companies can simply charge more for their oil. Higher prices mean higher mark-ups, which means higher profits. In 2004, despite declining reserves, Exxon posted their highest profit ever. A carefully researched portfolio of major oil company stocks may be a hot bet if you're not into mutual funds.
Commodities, Commodities, Commodities:
A few general words about commodities. Perhaps the most risky, and conversely the most potentially profitable oil investment, is oil futures trading. A futures contract is an agreement to buy so many barrels of oil, at a set price, on a set date. If you know the price of oil is going to be way up a year from now, but you can lock in today's prices with a future contract - well, you see how it could work.
The major obstacle to futures trading is up-front cash. Unlike stocks, where you can open and fund an account online these days with as little as $500-$1000, most commodity brokers are going to want a significant deposit of $5000 or higher. But if you have courage, money, and a keen trading sense futures are definitely an option.
While no investment should be made without extensive research, betting that the black gold is going to get more golden is an idea with strong fundamentals backing it.