When crude oil prices hit record highs, it doesn't seem like a day goes by without hearing two or three people complaining about the price of fuel. Indeed, the surge in prices is a source of concern and sometimes disappointment - for everyone. Well, for almost everyone: while almost all of us suffer the consequences when we refuel, some people actually make their money by taking advantage of the situation, and it's not just oil company administrators who cash. Here's how you can make money from the oil boom.
Steps
Step 1. Operate with due diligence
It does not matter what you are investing in, it is important that you decide in the most informed way possible. Reading an investment prospectus is a good start, but your research shouldn't stop there. Due diligence is the process of researching an investment before buying, and includes examining the historical returns of an investment, understanding the terms of the investment and analyzing its future potential. While no one can know for sure how any investment will go in the future, you can make better valuations if you are well informed.
Step 2. Think about your risk appetite
Every investment carries a certain degree of risk or uncertainty, but some carry a much higher risk than others. Each person should choose investments based on their risk appetite, which must be determined based on age and financial situation, the degree of portfolio diversification and personal preferences. A young person who is just starting to invest generally has a higher risk tolerance than a retiree, because they need a steady income, while the young investor probably has a steady income, but is looking for the maximum return on an investment.. Furthermore, the more diversified your investment portfolio, the greater your risk appetite, as you only lose a fraction of your total portfolio if any one of your investments fails.
Step 3. Open a brokerage account online or with a local brokerage firm
Most of the investments listed below must be purchased through a stockbroker or through an online brokerage account. Whether to use a stockbroker or trade alone is up to you. A stockbroker typically charges a higher commission, but it is possible to get advice and develop a personal relationship. Online brokers vary in the level of assistance and advice, but may be suitable for some investors.
Step 4. Consider your options
There are various ways to profit from high oil prices. Some of these are listed below for your convenience. The list starts from the theoretically highest risk investment to the lowest risk investment, although the actual risk for each type of investment will depend on the specific timing and actions, funds, or condition in which you are investing.. Generalizations on the level of risk are no substitute for operating with due diligence on a real investment perspective.
- Buy an oil well. Obviously, if you own an oil well, your revenues increase as oil prices rise. There are, of course, a lot of operating expenses to consider before buying such a business, there is a lot of uncertainty as well. Wells that produce cheap oil and those that have large reserves are typically not for sale, and those on the market are outrageously expensive. In addition to buying production wells, it is possible to buy exploration wells or invest in companies that start drilling, but such investments are also riskier than they may seem. You will need a fair amount of money and a gut of steel to enter this market sector.
- Buy oil forward. Crude oil is a commodity and futures are traded on the commodity market. The market has developed a number of sophisticated financial instruments, but the most common is the forward contract, in which the buyer buys the obligation and the right to sell a certain quantity of a commodity on a certain date in the future. Buying oil futures essentially involves predicting what the price of oil will be on the date and is extremely risky.
- Invest in a commodity-related exchange traded fund (ETF). Exchange traded funds are similar to indexed investment funds based on the price of one or more commodities. As in the case of futures, these are risky and depend solely on the price fluctuations of the commodity. They market themselves like stocks, however, and therefore offer much more freedom in trading operations. An example of an exchange traded fund (ETF) that is based on the price of crude oil is USO (United States Oil Fund LP).
- Invest in an oil royalty investment company. This type of company guarantees shareholders distributions of profits from one or more oil production operations. Distributions - often called "dividends", although technically they are distinct from dividends and must be reported separately on US tax forms - can be surprising: up to 30% or more annually on investment. Unfortunately, the amounts are difficult to predict, because the production of a given field is subject to all sorts of uncertainties, not least that the reservoir of the field could run out. Some examples of US royalty investment firms include Permian Basin Royalty Trust (PBT); BPT (BP Prudhoe Bay Royalty Trust); and TELOZ (TEL Offshore Trust). In Canada, there are even more, including PWE (Penn West) and HTE (Harvest Energy Trust). An added benefit of owning shares in this type of company is that, unlike other dividend-paying shares, distributions are often paid monthly.
- Buy stock of support companies. There are only a few large oil companies that are publicly traded and produce most of the world's oil, and their shares are usually quite expensive and do not typically fluctuate sharply and rapidly (either up or down). If you're looking for something a little riskier (and potentially more profitable), consider buying stocks in companies that supply the large oil multinationals with their specialized tools and research. Some of these companies are quite large and diverse, but many are smaller engineering or technology companies that could win a high-value contract for a new technology. Or they could just go bankrupt.
- Buy shares in companies engaged in the transportation of oil. These include companies that own pipelines (such as Constellation Energy in the US) or oil tankers (including names such as Frontline Ltd. and Nordic American Tankers, both outside of Bermuda). Companies like these also pay large dividends, and their share price typically doesn't correlate closely with the price of crude oil.
- Buy stock in an alternative energy company. In the long run, rising oil prices should make alternative energy sources much more attractive. If you wish to prepare for this scenario, or if investing in oil leaves a bad taste in your mouth, you could invest in companies that research, design and produce alternatives to oil. As it is difficult to say what the great new fuel (s) of the future will be, and it is even more difficult to say how companies will find the best way to exploit these fuels, this can be a risky move. Ironically, the big oil companies are the biggest speculators in alternative energy, so don't ignore this possibility if you're simply looking for a profit in this growing market.
- It buys shares of the big oil multinationals (Big Oil). Seven huge oil companies control most of the world's oil, and their share prices benefit from record crude oil prices. Furthermore, these companies are large and diverse enough to offer some protection for sudden drops in oil prices. Stocks are expensive, though, and don't offer much chance to get rich overnight. Smaller oil companies offer a little more risk (and potential returns) for more intrepid investors.
- Invest in a mutual fund that owns shares in oil companies. Most investment funds have shares in at least one or two oil companies, and many have shares in supporting companies as well. You are calmer if you invest in a mutual fund for the long term and choose one based on performance and overall management, rather than a specific company, but if you want to bet on oil and export a little less in terms risk, mutual funds may be the right way to go.
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Use less oil. There is a safe bet on this, which is to reduce one's dependence on oil. Drive less, use public transport, buy a fuel-efficient car and improve energy efficiency at home, and you can partially avoid the consequences of rising prices. It may seem like you're not earning money, but remember: a penny saved is a penny earned.
Make Money As Oil Prices Rise Step 5 Step 5. Make your investments as part of a diversified portfolio
It's an old adage, but it's never expressed enough: the surest way to make money while protecting yourself from market uncertainties is to diversify your investments as much as possible. Nobody should put all their eggs in one basket.
Make Money As Oil Prices Rise Step 5 Advice
- Remember the adage: "Buy low and sell high"? Oil prices are booming now, so everyone wants to take action. Yet will they hold high or will they collapse? Nobody knows, but make sure you've come to your conclusions before investing. A good rule of thumb is that if there is a "wikihow" about an investment, it means the market is already too saturated and it's time to sell.
- If you are looking to hedge your stock portfolio with commodities, oil is probably not the best choice. If the economy goes into recession, the demand for oil is likely to decline, and the price of oil could plummet along with your shares.
Warnings
- Do your research. Do not simply trust the advice of others, including your investment advisors. In most cases, if you end up losing money because you weren't well informed enough, you have no one else to blame but yourself.
- This article is intended to disclose only general information. Do not make investment decisions based solely on this information or on any other general source of information.
- Beware of the tax implications of some investments. Taxes can be a pain for any investor, but for sophisticated financial instruments, the tax implications can be extraordinarily complicated.
