There’s no denying that the pandemic has left the stock exchange more fragile than it had been in years. This is the reason answers to questions such as ‘how to buy oil stocks’ can be extracted by following the right strategy, which you can only devise if you understand the market. There are a lot of factors affecting the energy sector than just COVID-19, including the environmental concerns and political transgressions around the world. From a beginner’s lens, we sure need to look at a lot more to get started.
Keeping our focus mostly on oil and the pandemic, the oil companies saw a severe dip when prices went down when the WHO declared COVID-19 a pandemic. But by the end of 2020, most of the affected companies on the stock market moved towards recovering. Even though the oil market is not on a very high boom, there is still a high demand for oil, worldwide. In the year 2021, analysts have predicted growth and increase in demand as many economic activities will move towards development and expansion. As an investor that is a positive sign to look for in any project, you are interested in. You can choose to invest in oil as a direct commodity or as indirect energy equity in the form of ETFs etc.
The oil industry includes multiple variants from crude oil to refined oil that is used to make multiple petroleum products. You cannot deny the demand for the product, considering its use in various processes in this industrial era of production. According to the independent statistics and analysis of the U.S. Energy Information Administration (EIA), the current demand for oil is estimated at 98 million barrels per day around the world. There’s hardly any country not striving to industrialize, therefore the demand is expected to grow, making the oil industry as important as it can ever be. Let’s look at some questions regarding how to invest in oil stocks and what affects the industry:
1. Is it safe to buy oil stocks?
It’s not every day that economies are faced with the onslaught of a worldwide pandemic. So when one does come face to face with a virus that has the potential to become a deadly plague, there is bound to be some unpredictable decisions and reactions by everyone. If we look at how people created a toilet paper shortage because they panicked and weren’t aware of how to react during a quarantine, it all makes more sense. The financial market is still much larger and a lot more is at stake, so people are more likely to panic with something like that.
What happened during that initial panic cannot be discarded and expected to never happen again. The stock market depends on speculation and perceptive value, it is made to work in such waves. But the recent events have given us some precedent and any such event in the future will not leave the investors and the institutes involved without entire control. So yes, it is safe to buy oil stocks and include some energy-related investments in your portfolio. If the statistics and forecasts show us anything, it’s growth, which means the industry will do good, and so will the investors in oil.
2. What is a direct investment and indirect investment in oil?
There are risks involved with all types of investments unless you are going for a government program that does not involve a huge risk. The financial markets are a game of risk and reward, the one that invests smartly can master a balance between them. Let’s look at the different options we have to invest in oil stocks:
Direct investment in oil:
Direct investment in oil includes financial instruments such as oil futures or oil options that are two different types of derivatives used in contracts. The difference between these two is about the obligation to buy or sell the securities in the stock in the future. Futures however involve a high amount of capital required for investment along with a high risk involved due to its instability.
Other than those, there are Exchange-traded funds or ETFs based on commodity oil that are similar to stocks in terms of investment. You can buy them as you do with stocks, their results are more day-to-day.
Indirect investment in oil:
There are other Exchange-traded funds or ETFs that are not commodity-based that account as indirect investment opportunities in the oil industry. Along with that, mutual funds are another type of indirect investment opportunity you have in oil. Some examples are iShares Global Energy Sector Index Fund and T. Rowe Price New Era Fund, respectively. These energy-sector-based investments help you invest in oil stocks and oil services companies which are way less risky than direct investments as well.
The bottom line for investors is that you need to do your research and get informed about what kind of investment opportunities you have. This includes both stock-related investments or otherwise because the demand for oil makes it easy to justify the buying and selling of oil for investment purposes.
3. Will oil stocks recover?
This question has been answered in a way before, but to make it clearer, the demand for oil worldwide is stable to a high value and is predicted to grow in the future. It is the right time to buy oil stocks or any other oil securities you are interested in with a steady mind. Oil is one of the leading industries in the world, and the plummeting of its stock once in 20 years due to panic cannot take its overall demand away.
The oil stocks have severely recovered from the initial impact of the pandemic, and the coming years look promising for the industry.
4. What factors affect the oil prices?
A major chunk of the energy we consume is reliable on oil to run it. So much so that developed economies spend large amounts of money to reserve oil for future use. These reserves also act as ways through which future oil price predictions are made. All these and much more accountable for how the price of oil is determined, let’s take a look at each:
- Supply is an integral part of any market, and oil is no different. Saudia Arabia. USA and Russia are the top oil producers around the world but the hunt for oil has considerably gone down over the years as reserves do not seem to turn up as frequently as they used to. But this is a factor that can be worked upon if countries spend more on exploration around prospective areas.
- Demand, another essential factor that determines oil prices, this is pretty much the same as the demand and price relationship of any product. In 2020 oil companies around the world had to make cuts in production due to unstable prices during the first few weeks of lockdown and economic halt. This is an example we have already considered, and the once-in-a-lifetime event that occurred justifies people acting irrationally. All this to say, the demand determines the value and thus the price of oil.
- Speculation also plays a part just as it does in any company that is listed with the stock exchange. People’s perceptions and ultimate expectations of how a company is performing help drive its stock’s value. It’s the same with the oil market and its price. People who are invested in the future contracts of oil-related securities all attribute towards the price of oil according to many analysts.
- The quality of the oil is another factor affecting ultimate prices. Crude oil has many types depending on the location it is being extracted from, the procedures that go into refining oil make up a part of its cost. This is why quality is also an important factor for the price of oil just as demand or supply.
5. When should I invest in oil stocks?
The answer to this question is easy and a good way to end this article or guide, however, you would like to take it. Whenever you have a rough understanding of the market, its respective influences, the possible factors that might affect it, that is a good time for you to start your journey and invest in oil stocks. Keep an eye on the oil price, the market conditions, and develop your own sense of judging the predictions and forecasts laid by the professionals. Being informed and keeping track of the market situation is an ideal way to be prepared to invest. Hope this explains why how to buy oil stocks is accompanied by so many other questions.