If you are thinking of diversifying your investment portfolio, the oil market will be your best bet. However, investing in the oil market can be extremely confusing even for professional investors because of occasional large price fluctuations daily.
The oil market prices are dependent on the supply and demand of the consumers. Current world demand stands at 98 million barrels per day. Most of this demand is from emerging market economies that need fuel to run their industries.
With higher oil prices, these emerging economies provide subsidies for consumers, resulting in increased demand from consumers across the country. But this can also cause the country’s oil producers to sell at loss.
Removing subsidies can allow a country to ramp up its oil production which in the long term will keep oil prices low. Higher oil prices incentivize the refineries to increase the production of diesel and gasoline.
On the other hand, if we look at the supply of oil, the average production of oil is around 94 million barrels per day. The economic slowdown caused oil prices to slump which led to cuts in the budget for exploration surveys. The Discovery of new reserves in 2017 was the lowest since the 1940s.
Moreover, oil-producing countries have reached their maximum production capacity so these production figures will stay here until production capacity is increased by OPEC countries.
Apart from supply and demand factors, oil prices can be affected by the investors and speculators bidding on oil future contracts. Pension and endowment funds hold commodity-linked investments in oil. While speculators trade oil stocks on a short-term basis for quick profits leading to sudden fluctuations in oil prices.
Moreover, OPEC countries can influence the prices of oil to their benefit. These countries control 50% of global oil supplies, and increase and cut production at their discretion.
Most of the trading in the oil market is done in the derivatives market, utilizing futures and options contracts. Individual investors cannot invest directly in these but there are several other options. One option is to invest in stocks of oil drilling and service companies.
Moreover, investors can also indirectly invest in oil by purchasing energy-sector ETFs. You can invest in energy-related stocks through energy-sector mutual funds. These ETFs and mutual funds invest only in oil stocks and oil companies. These are also low-risk options.
If you are looking for a direct investment option you can invest in exchange-traded funds or exchange-traded notes that invest in oil futures. These products follow the price of oil and do not depend on the stock market trends. Moreover, these stocks serve as a hedge and a portfolio diversifier.
As an investor, you have many options to choose from. You can either go for a single-commodity ETF or a multi-commodity ETF that covers a variety of energy commodities.
At the end of the day, you have many oil investment opportunities. You just have to decide whether you want to invest indirectly through energy stock or directly through a commodity-linked ETF. The oil market has something for everyone, especially for people looking to diversify their portfolios.