When it comes to large investments, the commodity market has always been considered one of the main investment instruments. The dynamics of the stock industry have led to the fact that even a small amount of capital can now be invested in raw materials. However, many private investors do not consider the oil or gas market as the most promising investment, although such investments do not have a direct correlation with stock markets and can be considered an effective tool during the recession, as well as for the diversification of the investment portfolio.
Regardless of the preferences of investors, oil and natural gas prices depend on the global situation on world markets, so despite the deceptive stability and demand for energy, the investor has the same risks as in the case of investing in other markets.
As for liquidity, investing in raw materials, and especially in the oil, is a fairly liquid investment in the long run.
Investment in oil, gas, raw materials
Investments in raw materials do not imply the direct purchase of natural gas, crude oil, or fuel oil. There are many investment options. It is possible to purchase futures, including the purchase of options. If the investor prefers operations on the stock market, it is possible to acquire shares of oil companies, as well as involved in the direct or indirect process of production, processing, and sale of commodities. In addition, it is possible to invest in PIFs focused on individual industries and industries.
If you prefer ETFs, the portfolio of a certain fund from the shares of companies belonging to the investor’s chosen category of raw materials, allows you to access directly physical raw materials, securities, as well as futures for both basket and individual commodities.
Classification of investments in oil, gas, raw materials
So, there is a wide variety of commodities, including oil, natural gas, coal, fuel oil, and other derivative petroleum products.
The main categories that best reflect the industry should be identified:
- Brent and WTI crude oil;
- Natural gas, futures traded on the NYMEX exchange;
- Coal, including coking coal;
- Derivative petroleum products, which can include fuel oil and gasoline;
Each individual category of raw materials has its own market and exchange platforms, where they can be bought and sold.
Goals and objectives of investing in oil, gas, raw materials
As in any investment category, investing in oil, gas or raw materials implies profit. Continuous changes in supply and demand for these resources, as well as significant price changes throughout the history of commodity trading, show the prospect of this direction. Moreover, changes in energy prices, be it gas or oil, have an extremely high impact on the economies of individual countries and companies. In this case, investment in commodity markets should be seen not only as an income-generating tool but also as an important tool for risk minimization and portfolio diversification. Today, thanks to the development of exchange infrastructure and technologies, almost every individual investor can invest in commodities.
Ways to invest in oil, gas, raw materials
There are several ways which a trader can take into account when it comes to investing:
Investing in futures
Each commodity market is unique and depends on different factors. However, the most popular and sought-after markets are oil and natural gas markets.
If you intend to trade in oil, then you may be able to have oil brands such as Brent, WTI, and Light Sweet. Brent crude futures are traded on the Moscow Exchange and are available through the opening of a trading account with a licensed brokerage company. Unlike Brent, WTI crude is traded on the NYMEX exchange in New York. Investing in futures is considered to be the most liquid investment. Moreover, the investor has access to leverage and the right to sell – short sell, giving additional risk management capabilities.
Investing in PIFs
Access to oil or gas investments can be made through PIFs that invest in commodity markets and companies related to the extraction, processing, and use of raw materials. As in all areas of investment, investments in PIFs have their pros and cons. It is necessary to approach with special care the choice of the fund and study the history of its management.
But if you think that a company specializing in the raw materials market has great growth prospects, then investments can be made directly in the shares of the company on the stock market.
Investing in CFD contracts
To invest, you need to open a trading account with a brokerage company that provides its clients with tools such as a contract for difference (CFD). It is important to note that CFDs are more used for speculative exchange transactions because it does not involve the direct purchase of goods. However, such a tool can be a convenient solution in the case of limited investor capital.
Risk of investing in oil, gas, raw materials
Investing in the fixed-term market, as in many other markets is not risk-free. A distinctive feature is a fact that the oil market is more dependent on the political situation in the world. Due to the fact that there are few major oil producers in the world, there are geopolitical risks not associated with fundamental factors. In addition, the countries in the cartel have a strong enough influence to influence the cost of oil, which in turn is not inherent in a free market economy.
Of the equally significant factors, it is worth noting the development of technologies, such as alternative energy sources, displacing the use of classical energy resources, as well as the extraction of shale oil and gas.
It is important to note that the risks of investing in commodity markets are also related to the tools through which you invest. For example, investments in shares of gas companies do not limit you from the risk of bankruptcy of the company itself, even with rising gas prices.
The result of investing in oil, gas, raw materials
Speaking about the prospects of investments in raw materials, we can confidently say that there is room for maneuver and large incomes. Each of the markets is specific and unique, so there are opportunities not only to find a profitable investment tool but also to use these markets for good portfolio diversification.
It is impossible to give a clear conclusion about the entire industry, but its attractiveness and prospects will not disappear in the next decade, even though radical changes in technology and the de-dependence of the planet on energy needs.