If you are like me, you probably like learning or understanding ways in which you can invest to make money. Oil and gas industry is one sector that can provide great investment opportunities. However, what is the best way to invest in oil and gas?
Investing in the oil and gas sector is complex, but can be very lucrative. There are three main industry segments where you can invest in. These include upstream, midstream and downstream segments of the oil and gas industry.
Every investment requires you do due diligence to understand the risks and benefits of taking an investment action.
Investing in oil and gas provides you with great financial benefits. This is true when the market conditions works on your favor.
However, you also get exposed to financial risks that come with making an investment. Investing in oil is not easy, but it can be one of the best investment opportunities when done with care and diligence.
The idea is for you to reduce your risk and maximize the potential for returns in your oil investments. This will start by you understanding the basics of the oil and gas industry.
You will also need to learn the different ideas or strategies of investing in the petroleum industry.
Investing in Oil and Gas
As you embark on the journey of investing in the oil and gas industry, you should be aware that this comes with certain risks.
The top investment risk in oil and gas are;
- Commodity market risk
- Price Volatility risk
You should note that long-term investments in the oil and gas sector can be highly profitable.
However, as an investor, it is advisable you understand the industry and the risks involved before investing.
This is an interesting and attractive investment option for both day traders and long-term value investors. There is liquidity in the market, which can help you to diversify your portfolio and hedge against inflation.
As you start investing in oil and gas stocks, watch out for changes in the supply and demand markets. The stocks are sensitive to movements in the global markets.
An emerging risk is the one associated with ESG. Investors are becoming increasingly keen to see oil companies taking actions to support ESG programs.
It is my opinion that this might have an impact on the prices of oil and gas stocks in major stock exchanges across the world.
Factors that Determine Oil and Gas Investments.
To make investment decisions, you should ensure that you have enough information and data at your disposal.
It is important to base your decision to make oil and gas investments based on sound economic factors.
Oil and gas investments are determined by three main factors;
These factors drive the prices of oil and gas in the market. As an investor, you should know how oil prices are moving up and down.
If you are a beginner in oil and gas investing, you will need to be monitoring how oil prices are changing on a regular basis.
You will need to understand either Brent or WTI crude.
Brent crude is the oil that comes from oil fields in the North Sea region. This is used as an international benchmark for oil prices.
West Texas Intermediate (WTI) is a type of light crude oil that comes from the United States. It serves as the domestic benchmark for U.S oil prices.
Best Ways to Invest in the Oil and Gas Industry
Here are the top nine best ways in which you can invest in the oil and gas sector. They include;
- Buying stocks or shares.
- Futures contract or options.
- Exchange-Traded Funds (ETFs).
- Mutual funds.
- Invest in MLPs.
- Buying mineral rights.
- Buying actual crude oil.
- Start an oil or gas business.
- Offer skills or expertise to the industry.
This list just provides you with a few of the top ideas or ways in which you can use to invest in the petroleum sector.
9 Best Ways to Invest in Oil and Gas Today
If you are keen to invest in the hydrocarbon sector, you can consider the following ideas. These are the nine best ways to invest in the oil and gas today;
Buying stocks or shares.
This is one of the ways in which you can participate in the oil and gas industry. It involves buying of oil or gas-based shares in the stock market.
You open an account with a stock broker, and place your order to buy shares. With technology today, you can do this by using various trading apps provided by oil and gas brokers.
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Futures contract or options.
Oil and gas are commodities. In commodities market, you can trade using futures contract. These are simply agreement that set the quantity and price of commodity being traded and set at a date in the future.
You can use futures and options to trade in oil or gas resources in the commodities exchange.
Exchange-Traded Funds (ETFs).
This is a direct method in which you can participate in the oil and gas industry.
You will be able to buy commodity-based exchange-traded funds or ETFs. It is important to note that ETFs are traded on a stock exchange.
They can be bought or sold just like the stocks. For example, you can buy one share of the U.S Oil Fund which would give you exposure to about one barrel of oil.
You can also invest in oil and gas sector indirectly by using mutual funds.
Investing in the oil industry can be done through the purchase of industry-focused mutual fund shares.
While there are a number of mutual funds that have substantial holdings in the oil sector, the majority of funds fall under natural resources or energy categories.
Some of the top energy mutual funds are;
- Vanguard Energy Fund (VGENX).
- Fidelity Energy Select Portfolio (FSENX).
- Blackrock Natural Resources Trust Fund (MDGRX).
- Integrity Mid-north American Resource Fund (ICPAX)
The oil industry provides investors an opportunity to participate in a growth-oriented equity market that boasts exponential profit margins for the long term.
Invest in MLPs.
This is a very direct option of investing in oil wells.
An MLP or Master Limited Partnership is a type of business entity that is publicly traded like a stock.
It gives you an opportunity to take advantage of the tax benefits of a partnership. This means you only pay taxes on the distribution you get.
MLPs are best for investors looking to earn cash flow from their investment. They are not as volatile as commodities in many cases. But they have some unique tax reporting rules and don’t usually appreciate in value all that much. This makes them more of a niche investment than regular oil stocks.
Buying mineral rights.
This is very common in the United States.
It simply refers to the ownership of the resources under a piece of land. In your case, this would be owning the oil or natural gas under the land whose ownership you own.
This is another good way of investing in oil and gas.
Buying actual crude oil.
If you are really interested in having the actual barrels of oil, you can invest in it. You will just need to have the capacity to store and handle the barrels of oil when they are delivered.
Start an oil or gas business.
You can also invest your funds into starting an oil or gas business. Starting a company is not easy, and for sure, it is harder when it comes to an oil and gas company.
However, you can do it and it is one of the risky but best ways to invest in the oil and gas sector.
Offer skills or expertise to the industry.
You can also invest in the petroleum sector by offering your skills or expertise. This applies to professionals who want to work in the industry.
There are also emerging opportunities for you to monetize oil and gas through other means.
It is possible today to invest in an oil and gas-based content business. You can start and build a blog business which will generate you passive income.
It is the same case if you were to start a YouTube channel to focus on the oil and gas content.
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Is Oil and Gas a Good Investment?
To decide whether oil and gas is a good investment, you need to analyze the performance of the industry.
An investment is considered good or bad based on the risks and the potential return on the investment.
While the risk of investing in oil and gas are high, the upside is that you can also make a high return on your investment.
Oil and gas industry benefits from tax advantages. For example, drilling costs from drilling equipments to labor are up to 100% tax deductible.
In this regard, oil and gas investments are a great write-off against income or gains in other areas.
This makes oil and gas a very good investment to consider.
When You Should Invest in Oil and Gas
If you are interested in investing in oil and gas, you should be keen on when to enter the market.
Your choice of timing is going to determine if you are going to make a profit or not, and the margin involved.
The principle when investing in oil and gas stocks is to always buy when the prices are low, and sell when the prices are higher.
While this is the general idea, you should be aware that price of oil affects different oil stocks differently. That is why doing research and understanding the market is important.
What is the Best Way to Invest in Oil and Gas Sector?
As an investor, it is possible you are wondering about the best way to invest in oil and gas industry.
The best way to invest in the oil and gas sector is through the stock market. You will be able to benefit from the performance of the listed companies.
Stock market provides a big opportunity for a beginner or an experienced investor to buy or sell shares. It is also possible to invest and earn fro the dividends paid by companies.
Another good way of investing in oil and gas is by trading oil futures. You can add ETFs into the list of some of the best ways you can get involved as an investor in the oil and gas industry.
In conclusion, investing in oil and gas is one of the ways you can build and grow your wealth. This is important when you are keen to improve your personal finances.
Investing in assets is keys to financial success.
As you work towards creating your best strategies to invest in oil and gas, always remember that investing comes with risks.
Investing in crude oil or natural is not different.
The best way to invest in oil and gas will range from direct to indirect investment.
Direct investment into the petroleum sector involves dealing with oil as a commodity. Investing indirectly in oil and gas involves oil-related equities, ETFs and option contracts among others.
It would be best for you to invest in oil and gas through a broker. Also, seek advisor from a qualified and registered financial advisor.