In the modern world, oil is one of the most important and valuable commodities. Crude oil, commonly known as petroleum, is extracted from the earth using big oil rigs and refined through several processes to produce gasoline and other products.
Conversely, the end products of crude oil are used to produce items such as bike tires, mops, toilet seats, deodorants, paint, perfumes, hair coloring refrigerant, and umbrellas.
Despite the advance in technology, there is no permanent global substitute for petroleum currently, and the world heavily depends on petroleum in the production of the mentioned products.
The high demand for oil and limited physical supply has led to many oil investment opportunities for investors in the oil and gas industry. Here are the 4 different ways you can invest in the petroleum industry.
1. Oil Exchange Traded Funds
Investing in exchange-traded funds, or mutual funds, offer diversification of portfolios at a low price for investors. This diversification offered by mutual funds reduces the risks involved in the oil industry. An investor can buy shares in a single fund to get exposure to different stocks in dozens or hundreds.
There are many oil and gas companies which one can buy shares from, such as the upstream companies, which focus on the first step in the oil supply chain, which is the exploration and production of oil. Exploration companies focus on buying land known to contain oil resources, and if the land is rich in natural resources, the investors earn massive profits. On the other hand, production companies focus on developing land containing natural oil and gases and the extraction of these resources from the ground.
Conversely, another type of company one can buy mutual shares from is the transportation and storage companies. These companies, commonly known as the midstream companies, are involved in transporting oil & gas to refineries using large oil tankers, pipelines, or tracks where they are turned into useful products.
Lastly, an investor can buy shares in refining and sales companies, commonly known as downstream companies. These companies turn raw materials into more useful products such as heating oil and gasoline and sell them to consumers or other production companies. Depending on the company you are interested in as an investor, you can easily start investing in exchange-traded funds (EFTs). Read more here https://www.forbes.com/advisor/investing/crude-oil-investing/
2. Oil And Natural Gas Futures
A futures contract is an agreement between buyers and sellers to complete the transaction at a set price on a set date in the future. This type of contract is one of the most direct ways to invest in the oil industry.
Futures allow the buyers to secure costs of raw materials they require months ahead of the time they need the materials, which makes production costs more predictable. Oil futures are highly liquid and offer the possibility for significant returns, which makes them even more popular. Since a single futures contract involves one thousand barrels of oil, investors may get a large stake in petroleum at a lower cost.
3. Equity Direct Participation In Oil Wells
Direct participation programmers in the oil industry create a limited partnership by pooling investor money and using the funds to finance oil-related projects such as drilling and extraction of oil from the wells and storing and refining oil.
Once in effect, the investor automatically becomes a partial owner of that specific oil company. Investors also receive tax advantages and cash flow during the direct participation program.
4. Buying Mineral Rights
Another direct option of investing in oil is through buying mineral rights. Buying rights refers to owning resources such as oil, precious metals, or natural gas under a piece of land. People with ownership of mineral rights to land rich in natural resources sell them to oil companies which greatly produces their cash flow.
Oil Investing Conclusion
Investing in oil opportunities can bring big returns to its investors. Having the above information will help you as an investor increase the chances of having high profits.
Also, investing in oil has many benefits, such as tax benefits such as breaks in passive tax income, consistent cash flow, and a diversified investment portfolio. In addition, oil investment has led to technological advancement through the invention of machinery and tools used during crude oil extraction.
Lastly, since oil production is not affected much by stocks and bonds, you don’t have to worry about market fluctuations making oil investing the best investment. The oil and gas market is here to stay for a long time, so you should strongly consider investing.