How to invest in crude oil?

By Super

Updated: Tuesday, February 19, 2013, 14:08 [IST]

Crude Oil - is 'darling' of all commodities during economic imbalance. Investors love to keep crude oil in their trading basket whenever there is any disruption, be it on supply side or demand side.

Economies of the world are largely dependent on the crude oil as it is one of the key drivers for the success of an economy. The price of oil and gas continuously fluctuates up and down betting upon supply and demand situation which can make an investment lucrative. At the same time, investors do need to weigh risks, as crude oil prices are extremely volatile to the market.

What determines the price of fuel?
Supply and Demand plays an active role for determining the prices of crude oil. If the demand grows or if a disruption in supply occurs, there will be an upward pressure on prices. Alternatively, if demand falls or there is an oversupply of oil in the market, there will be downward pressure on prices.

What ways you can invest in oil?
Coming up to the ways of Investing, there are number of ways an investor can get exposure to oil. Below are the three ways to invest in oil:

Commodity futures market: The simplest way to invest in crude oil is to to invest through futures contract. Futures provide a 1:1 price participation, but they also expire with time. Oil futures are traded on margin which implies you have to put only margin (i.e. percentage of the contract amount) and the maintenance charges.

Purchasing a commodities futures contract on crude oil should not be attempted unless you have some investing experience. It entirely depends upon your risk appetite. If the value of crude goes up then the value of your futures contract also rises. If crude drops in price then the value of your futures contract drops.

Oil Exchange Traded Funds (ETF): ETFs provide an easy way to get exposure to wide range of commodities. Oil ETFs is like a fund which comprises of futures, options and forward contracts for different oil, gases, oil and petroleum company stocks.

The price of an oil ETF reflects the spot price of oil. You can buy the Oil ETF just like any other mutual fund. If the oil price goes up, your investment rises by very close to the same amount and if the price falls, so does the value of your investment.

However, they don't provide guaranteed returns and there are the fair chances that they fail to follow the price of oil. Many of them in the past have not tracked it well at all and left investors disappointed.

There are no Oil ETFs in India, though you can invest in overseas Oil ETF but they are exposed to high currency risk. It also requires large investment amount which makes it inconvenient investment option for a retail investor to invest in.

Oil stocks: Another way to invest in crude oil is directly purchasing the stocks of oil marketing companies like IOC, ONGC, Bharat Petroleum, etc. Or you can even purchase stocks of other companies which participate in the oil and gas sector. Example of such companies would be Essar Oil, a oil extraction company; Reliance Industries, a company with presence in the entire chain of the sector etc.

The stocks of the major oil companies are closely correlated to the price of oil which can provide you good return. Often such stocks pay a quarterly or yearly dividend, so your investment in such companies could provide you with an income for many years. You can purchase the same through your demat account with the help of any stock broker.

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