This is chapter number 2 out of 12. Read the rest:
Read Buying Oil Investments – Chapter 1: Introduction
One of the highest risk investments in the Oil & Gas industry is on the exploration side. Investment in this sector help to fund the exploration of new oil and gas deposits to help shore up our depleting fossil fuels reserves. The downside to investing in an exploration company is that the company might end up not finding anything at all or even if it did, the amount may not be commercially viable. However, if the company does strike it lucky, the return of your investment will be extremely high.
Less risky would be to invest in the oil & gas companies themselves such as a refinery rather than in the exploration companies. You have the option to invest in large corporations or smaller companies. These companies are more likely to make money for you as they are more established and have enough oil to turn a profit.
Another option besides investing directly into an oil and gas company is to purchase stocks of these companies. They are even less risky options than the two options mentioned above. Then again, the level of returns that you will make will always be commensurate with the amount of risk that you choose to undertake.
There are two ways with which you can invest in an Oil & Gas company’s stock. One way is by purchasing the stock of the company directly. The other way is through mutual funds. In either case, before you undertake such a move, you ought to understand what you are trying to achieve with your investment objectives. All forms of investment carry some form of risk and if you do not understand the level of risks that are involved, your first step should be self-education. In addition, you should also consult your broker or financial adviser before making a move into investing in the Oil & Gas industry. You can find brokers which have a proven success rate in the oil and gas investment industries on our Oil Brokers page. The following are some of the ways you can get involved with investing in Oil and Gas:
The easiest way to begin investment into the Oil & Gas industry is to invest by way of Mutual funds. There are mutual funds which specialize specifically in this sector of the market. These have their own focus which range from oil exploration companies to those more established companies with ongoing oil production capability.
What is attractive about mutual funds is that all the necessary research about the Oil companies has been completed by the in house professionals who check out these companies which have been earmarked by the mutual funds. In short, due diligence has been performed. You will also be able to get more details about projected returns of these mutual funds based on the trading strategy adopted by these Funds.
It had been said that the Oil & Gas industry is a “sunset industry” as evidenced by the dwindling number of oil companies in the industry. Most of these companies in fact have been brought over by the oil giants that are still in existence. An example of this can be seen in the merger between British Petroleum (BP) with what was formerly the Standard Oil of Indiana to become BPAmoco. (Today, it has renamed itself to BP again with the tagline “Beyond Petroleum,”)
It is a natural reaction to expect that if the Oil & Gas industry is going through a major restructuring process, one ought to avoid investing in this industry. However, the fact is, oil companies are making more money than ever. For instance, Exxon Mobil Corp reported revenues in 2005 of $340 billion, an increase of over 25% from 2004. Reported revenue in 2007 was $404.56 billion. Since April 2008, the company has been placed in all the top ten slots for Top Corporate Quarterly Earnings.
In addition, the combined 2006 earnings of BP (BP), Chevron (CVX ), ConocoPhillips (COP ), ExxonMobil (XOM ),Royal Dutch Shell (RDS.A) and Total (TOT ) is larger than the Gross Domestic Product of the Czech Republic (2006 GDP: US$141.7 billion). In addition, the overall demand of oil is not declining. Even if the production levels fall, oil companies will just increase their prices. This is because the demand for oil is not very price elastic. Almost the entire economic machineries of the major developed countries have an extremely heavy reliance on this commodity.
Another method of investing in the Oil industry is to participate in the commodities market. The Oil Futures market is a highly speculative and liquid market. It is also regarded as one of the most risky financial instruments to invest in.
A Futures contract is an agreement between two parties to take delivery of a specific quantity of oil at a specific price at a specific future date. This enables the users of the commodity to lock in the price of the commodity to protect themselves from adverse price movements. For example, fuel cost is a major expenditure for airlines. Thus to prevent any adverse price increase from affecting their operational budgets, airlines can use Futures contracts to hedge their fuel costs.
Nevertheless, the large initial capital layout will represent a barrier to enter this market for any small time investors. The majority of commodity brokers will require an initial deposit of $5000 or more before you can open a trading account with them. In contrast, nowadays with just $500 deposit, one can already open a trading account online and begin trading in the equity market. Having said that, for those who have “risk capital”, the futures market is an attractive market to invest in due to its high returns probability.
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion