Should You Invest in Oil? What Are the Available Opportunities?

Oil remains a crucial commodity and raw material for numerous industries, and it continues to play a huge role in the global economy. This is despite the push for renewable energy sources to take over from fossil fuels. With such a strong position, oil can be a lucrative investment that performs well even in times of high inflation rates, recessions and economic uncertainty.

However, the oil market and related investments are not always straightforward to navigate, especially considering how the value of this precious commodity is affected by global events. Even with everything going on in the oil market, let’s explore why you should invest in it and the opportunities available for investors.

Why Should You Invest in Oil?

Since it is an essential commodity with numerous uses, investors get several benefits from investing in oil. 

First, it is a great hedge against inflation. Cruise oil prices tend to increase in inflation, and they are also a driver of higher rates of inflation globally, since the price of oil affects everything. Numerous factors can impact the price of oil, including reduced US oil stockpiles or production by other countries.

As inflation reduces your purchasing power and the value of other investments, the rising oil prices can help stabilize your portfolio.

Second, oil is excellent for portfolio diversification. Investing in one asset class is never wise because its collapse could mean a steep decline in the value of your portfolio. Savvy investors turn to options like oil that perform as excellent diversification options.

Third, these investments can have a very high return. The price of oil fluctuates all the time, with this volatility providing opportunities for profits. However, this potential for a significant return comes with a high risk, so always protect your investment and keep an eye on the oil market to know when to exit likely losing positions.

Investment Opportunities in the Oil Market

There are several ways to invest in oil, meaning you can choose those that align with your investment goals, risk tolerance, and expected returns.

Oil Futures

The future market is the main way people trade oil. Buying an oil options contract means you must buy 1000 barrels at a predetermined price in the future. The trader or investor makes money if the price of oil exceeds the price they negotiated per barrel.

For example, they might enter a futures contract to buy a barrel at $90 in the future. If the price reaches $150, for example, they will have an opportunity to buy the oil at a lower price and sell it at the higher prevailing price. Since you do not deal with physical oil, you sell the futures contract at that price to a willing buyer.

Oil Options

These are contracts that give their holder the right to sell or buy oil at a predetermined price (strike price) at or before the expiry date. The holder is not obligated to do this, and they might choose to let the contract expire if the price at the expiry date does not provide enough profit to justify executing that contract.

Traders and investors can buy call and put options. A call option gives you the right to buy oil at the given date at the predetermined price, and you should only buy these contracts if you think the price will rise beyond your set strike price. A put option works the opposite way.

Options can be lucrative, but only if you use the right strategies. Whether you are a beginner or a seasoned trader, you can always learn an option selling strategy to know when to invest, how to maximize profits, when to exit positions, and how to minimize your risk.

Oil Exchange Traded Funds (ETFs)

Oil ETFs allow you to invest in funds that hold oil barrels, stocks, and futures contracts. They are traded on stock exchanges and are seen as an easier way to invest in oil than buying futures contracts.

Exchange Traded Notes (ETNs)

These function like bonds, where an institution issues an unsecured request for a loan, and investors provide it by buying their notes. You should only purchase these notes from companies you know are performing well because you can lose your investment if they go bankrupt.

ETNs differ from other oil investments in that you do not own the oil or an underlying asset as you would in an oil options or futures contract. Instead, you receive a return generated by these notes.

Investing in oil can be very lucrative because it is always in demand, and its price fluctuations provide numerous opportunities to profit. Doing so has several benefits, including having an excellent hedge against inflation, and several ways to invest in oil depending on your goals and the type of investor you are.