Before you decide to invest in oils, you must understand the forces that drive the oil market. Although the oil market can be confusing for an individual and professional investor, it is never a bad idea to put some of your financial stakes in oil by buying some of the best oil stocks. You have many options for investment and keep learning through more exposure in the oil market.
The most important understanding that investors must have about oil is that investors must look upon it as an asset despite being a commodity. Having the correct perception about oil will help analyze the market in the proper perspective to explore the options of investment that come with varying degrees of risk. In addition, it brings to the fore the question about how safe it is to invest in oil, known for wild fluctuation in prices that can leave investors in a state of stupor.
A case in point is the historically low oil prices during the initial days of the Covid19 pandemic in 2020. However, by the end of that year, the stock market’s recovery brought back the focus on oil for investors. They want to sow the seeds now to reap the benefits in the future.
Supply, demand, and speculation impact oil prices
Demand – 98 million barrels per day is the estimated demand for oil in 2021 is the forecast of EIA (The US Energy Information Administration). The rise in oil prices brings down the demand in the US. Still, as the growing and emerging economies focus on large-scale industrialization, the overall oil demand will increase.
Supply – Daily oil production in 2020 was 94.25 million barrels approximately. There has been a steep decline in discoveries since the 1940s that was lowest in 2017. The amount of reserves discovered kept falling in 2014, resulting from the fall in oil prices that put the brakes on oil exploration. Except for Saudi Arabia, most OPEC countries cannot increase oil output. As of 2020, only Saudi Arabia had a spare capacity of 1.5 to 2 million barrels daily. Saudi Arabia, the US, and Russia are the leading oil producers of the world.
Speculation – Speculation is another factor in addition to demand and supply that drive oil prices. As speculators and investors bid on oil future contracts, it impacts the price. Many institutional investors like endowment funds and pension funds have a dominating presence in the oil market by holding commodity-linked investments, which is a part of their asset allocation strategy. In addition, Wall Street speculators are looking for quick profits trade oil futures for a brief period. According to some observers, the wide short-term oil price swings happen due to these speculators, while many others consider that their influence is minimal.
To invest in oil directly, you can purchase oil options or oil futures. You can even buy ETFs, commodity-based oil exchange-traded funds that are traded in the stock markets. Purchasing energy sector RFs is also an option for investing in oil indirectly.
Do your research to decide on the type of investment that you would prefer.