What You Should Know About Investing in Oil

Investing in oil can be profitable but intimidating. Granted, the oil boom ended during the 1980s, and in an increasingly eco-friendly world, there has been the ascendancy of alternate fuel sources. However, there will always be a substantial demand for oil primarily because it is much more than just fuel for cars; oil is also used for producing a wide range of consumer products. Here are some important things to know about investing in oil.

It is a constantly fluctuating market. This characteristic makes the oil market one of the strongest investment magnets around. High oil prices have always created increased interest in investing in energy-related business ventures. However, oil price fluctuations are highly unpredictable; some fluctuations actually occur on a daily basis.

Determine Your Liquidity Needs

According to US Emerald Energy, a company you should look at while considering oil investing, not all oil investments are the same. Some of them, for instance, can be easier to quickly convert to cash than others. This feature is known as liquidity, and examples include exchange-traded funds (ETFs) and stocks. On the other hand, drilling an oil well does not typically offer liquidity. You should only invest in a well if you fully understand that you get back your money only when and if you see production. Other less “liquid” investments include minerals and royalties, even though it is increasingly becoming attractive to secondary market buyers.

Look Out for Sweet Crude

The best quality classification is what is referred to as “sweet crude.” Highly valued for its low levels of hydrogen sulfide (less than 0.5 percent) and carbon dioxide, sweet crude meets stringent environmental requirements in the industrialized world, especially the United States. It is from sweet crude that gasoline, heating oil, jet fuel, and diesel are derived. Bear in mind, though, that sweet crude is exceedingly rare, only found in a few countries in the world. The U.S., for example, gets its sweet crude from Nigeria and Angola, even though Saudi Arabia is the world’s dominant oil producer.

Watch Out for Scams

State securities regulators strongly recommend that oil investors be aware of fraudulent activities. The most common practice is to have limited partnerships—one of the more popular legal entities in oil investments—in one state, place the operation and physical presence of the field in another state and make offers to prospective investors in any state other than the two aforementioned ones. It is an arrangement that is hard for law enforcement officials, let alone victims, to identify, since investors are less likely to stop by the company’s headquarters or the oil well site.

Always Have an Exit Strategy

This is often overlooked when investing in oil, but it has to be said, especially if your investment has liquidity. You should have an idea of a selling price, just to make sure that your downside is protected. Also, have a high price in situations where you have to take some of the winnings. If you have less liquid investments, such as minerals and royalties, name your assets in your will to assure a smooth transition to younger generations; minerals and royalties can continue to produce revenue long after you are gone.

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