Oil is the basis of many products used globally, as well as the fuel for the majority of transportation, meaning it is a constant, consumable commodity. When it comes to stocks and their value, oil producers are some of the biggest companies in the world to invest in. Although this allows plenty of opportunities for traders to speculate on both the commodity itself, and the companies that rely on it, there is always a level of risks involved, as with any investment.
With significant volatility in the market and the many factors that influence its fluctuations, is oil always a smart investment? In this article, we’ll delve further into the advantages of oil trading, as well as its risks, to evaluate whether it has a worthy place in your portfolio.
Benefits of investing in oil
Trading in oil can be particularly beneficial when part of a long-term investment strategy, as this way it’s less affected by the day-to-day volatility of the market. For some investors and their style of trading, they favour the market fluctuations and difference in trader sentiments, that oil prices see. Oil trading can be seen as exciting, but does require constant monitoring of the market movements and influential fundamental factors.
With comprehensive research and understanding of the cyclical nature of oil prices, investing in this commodity can produce some significant returns. This is particularly so when trading in the shares of oil companies, rather than the asset of oil itself. Or, when trading with contracts for differences (CFDs), which allows you to speculate on the price movement of the commodity without owning the underling asset. These types of trading are beneficial when the market is affected by a surplus of supply, paired with a lack of storage facilities.
However, this does require taking the time to learn how to trade oil CFDs in order to open and close the contract accordingly to result in a profit. Likewise, understanding the timings of economic transitions, and when an oil company is experiencing growth and increased cash flow, can result in high yields from share dividend payments.
The risk of investing in oil
There are a number of significant risks when it comes to oil trading. The main one being the volatility of the market due to its reliance on supply and demand. The market has continuously seen a long-sustained period of oil consumption, but there are still fundamental factors that threaten the usage and need for oil.
Some of these factors are completely unprecedented, like the coronavirus pandemic in 2020. Lockdowns across the globe meant that there was a substantial decline in aviation travel and domestic travel, which caused a record-breaking drop in the demand for oil. This left fuel unused, with an unexpected high volume of supply, resulting in oil prices reaching lows that have never been seen before in its trading history. Another uncontrollable risk for the oil sector, is the occurrence of an oil spill accident, which can impact the production of oil, or its level of supplies.
Other factors that can impact oil investments are continuous trends, such as the pivot towards greener, cleaner and renewable energy resources. Traders should take such sentiments into consideration when deliberating oil trading, as it will influence the likelihood of it being a worthy investment in the future. However, some analysts believe that oil will always be a vital global fuel, and that the modern world will require fossil fuels for many years to come.
The worth of an investment in the oil sector is still debatable, as it provides both advantages and disadvantages. When considering trading in the commodities market, or any market for that matter, you should always conduct extensive research and ensure that the position you take is suited to your trading style.