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There are a variety of options for investors to gain exposure to oil as a financial asset. These alternatives, which range from investing directly in oil as a commodity to gaining indirect exposure to oil through the ownership of energy-related stocks, ETFs, or options contracts, all come with varying degrees of risk. A broker or an online brokerage account can be used to purchase each of these investment types.
Oil as an Asset
Because oil is the source of so much of the energy we use, it is an economically and strategically important resource for many countries. Large stocks of crude oil are held by countries like the United States for future usage. Changes in oil stock levels are reflections of patterns in production and consumption, and the measure of these reserves serves as a signal for investors.
Aside from supply and demand, investors and speculators bidding on oil futures contracts have also influenced oil prices. Commodity-linked assets are held by many big institutional investors presently participating in the oil markets, such as pension and endowment funds, as part of a long-term asset allocation strategy. Others, such as Wall Street traders, trade oil futures for very short periods of time in order to profit quickly. Some analysts believe these speculators are to blame for large short-term volatility in oil prices, while others say their impact is minor.
Oil Investing Directly
One direct means of owning oil is to acquire oil futures or options. Futures are very volatile and carry a high degree of risk. Furthermore, futures trading may involve lengthy research as well as a significant financial expenditure.
Investing in commodity-based oil exchange-traded funds is another option to directly own oil (ETFs). ETFs are exchanged on a stock exchange and can be purchased and sold just like stocks.
Oil Investing Through Indirect Means
Energy-sector ETFs, such as the iShares Global Energy ETF (IXC),5 and energy-sector mutual funds, such as the T. Rowe Price New Era Fund, can also provide indirect exposure to oil (PRNEX). 6 These low-risk energy-specific ETFs and mutual funds invest largely in oil and oil services companies' stocks.
Oil is one of the most volatile investment commodities accessible. Every day, traders and investors in the oil market have a plethora of options. Oil, on the other hand, is a risky investment due to its volatility. As a result, it is recommended that you hire an financial advisor to assist you in making oil investments based on technical analysis.