How to Invest in Oil Without Buying Any Physical Oil
Oil prices are on the rise again, and those who invested while it was on the decline several years ago are beginning to see their investment produce dividends. While the current rise in price is not substantial, there are a number of indicators that lead experts to believe that the price of oil and gas will continue to rise for the foreseeable future. If you have been considering investing in oil, you are not alone. It has been long-understood that the oil industry is a revenue-generating mammoth, but things have been tough over the last several years. While there will be a level of volatility with all of the geopolitical stressors on deck currently, you should still at least consider investing in oil.
The wonderful thing is that you can invest in the oil industry without actually buying oil. When most people talk about investing in oil, they are speaking of investing in oil futures, which is the most direct method for investing in the industry — purchasing oil as a commodity. Because most people don’t have the storage space to buy barrels of oil, nor the distribution channels through which to distribute it, the purchase of oil futures are the closest thing to direct purchasing.
What if you want to benefit from the positive movement in the oil industry, but you don’t want to buy into the industry directly? One way that you can do this is by purchasing Oil ETF’s. ETF’s trade on the stock market and they often invest in the oil industry. When you buy into an Oil ETF, you are buying into the ETF and benefiting from the investments made by the ETF. The greatest challenge associated with taking the ETF route is that these funds sometimes fail to follow the direct price movement of the underlying commodity — in this case, crude oil. This variance in price movement is caused by the fact that the fund is actually purchasing futures contracts that are constantly expiring or reaching maturity, which leads to a replacement of the contract with a new one at current market value.
The purchasing of stock from a reputable and high-performing oil company is another way to invest in the oil industry without actually buying oil. Buying public stock is like buying a small piece of a company and having your wealth grow at the rate at which the company grows in profit. Stock purchases are an easy way to invest in the oil industry without having to get your hands dirty. This is an immensely simple method for accessing and benefitting from the market. You can sign up with an online broker and purchase shares of oil companies with a few clicks of your mouse. You can also do it the old fashion way by calling up your broker and telling them what and when to buy.
An even less direct way to invest in oil is by investing in an index fund like the S&P 500 or the Vanguard 500. Indexing will allow you to own a piece of the top 500 performing companies on the market. Of course, some of these companies will be oil companies. The S&P 500 has consistently delivered an annual return of eight percent, and it outperforms actively managed mutual funds about 96 percent of the time.
Still another way that you can invest in oil is by buying MLP’s (Master Limited Partnerships), which is great for long-term investors. This is one way to avoid the frustrations of expiring futures contracts that impact price movements that mirror the price movement of the commodity. These MLP’s usually own gas and oil pipelines used to move the commodity from one geographical location to another. One benefit of taking this route is that these companies generally offer very attractive dividends to their investors. Additionally, MLP’s are very easy to purchase through the use of an online broker. There are also several mutual fund managers that invest in MLP’s. There can sometimes be a trailing movement when it comes to MLP’s, but they make great long-term investments where real-time price movement is not as much of an issue.
You are probably wondering which of these options are right for you. I recommend that you take the time out to determine your specific economic and investment needs. If you are looking for something more robust, then investing in futures and stocks may be best, but if you are looking for something more steady that has longevity, you will likely want to take the MLP route.