Why You Should Be Investing in Oil Now

The oil market is staging a massive recovery in 2019; this may be a year to not miss out on any involvement. Price has recovered over 35% from January, after hitting its lowest levels since June 2017. Given the current upside bullish momentum, there still appears to be much room for further moves north, as long as current fundamentals remain sound.

Oil, also known as ‘black gold,’ could be lucrative for your portfolio this year, as the market is on a huge path of retracement following a Q4 2018 disaster. Oil prices are notoriously volatile but can provide a high reward to an investor’s portfolio, but of course like anything there is still much risk. The volatility of the oil sector, in general, can make some nervous about getting involved. However, there are still some strong values despite this industry swings.

There are a wide variety of options for an investor to choose from if wanting to get involved with the oil market. Investors are able to explore the likes of futures contracts, mutual funds and exchange-traded funds (ETFs), in addition to oil and gas stocks. These are all areas that are available to be invested in. It can all be very much overwhelming in terms of what assets to buy. Before we take a look at each investment field, let’s breakdown the oil market and its fundamentals to make things more digestible.

Fundamentals of the Oil Market

Oil is a high-demand, heavily utilized global commodity. Given the status, there’s the possibility that significant fluctuations in price will occur. As a result of this, price swings can have a significant economic impact. Two key factors drive prices – supply and demand.

Supply and global demand have a considerable role in the influence of oil market pricing. At times when the supply is matching with demand, the prices in oil tend to remain above production costs. Producers are then able to make a profit from this. However, when these general fundamentals are no longer in balance, it can have a significant impact on pricing.

Supply

The Organization of Petroleum Exporting Countries (OPEC) is a massive orchestrator of the supply of oil. They take to lead with major oil-producing nations, determining price by either boosting or reducing crude oil production. The organization states its mission is “to coordinate and unify the petroleum policies of its member countries. Further, ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers. In addition, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”

The potential for OPEC to influence the supply/demand balance is enormous.

2019 Supply

As detailed earlier, oil prices this year are rising, with some thanks to a notable slowdown with the current levels of supply. OPEC’s oil supply recently dropped to a four-year low in March, according to a Reuters survey. The top exporter – Saudi Arabia – had over-delivered on OPEC’s supply-cutting promise.

Further within the survey, it suggested that Saudi Arabia and its Gulf allies have been pressing firmly ahead with more substantial supply cuts than what was called for within OPEC’s latest deal. The slowdown is likely influenced by the supply curbs from both Iran and Venezuela. They are under sanctions set by the U.S. to limit their respective exports.

Demand

When economic conditions are stable – i.e., growth is on the rise and nations are experiencing higher industrial production – these tend to boost demand for oil. The weather also has a strong influence on demand, particularly in the U.S. During the winter, especially if it is a very cold one, demand for home heating rises, which boosts demand for oil. Separately, demand also rises during the summer vacation driving season.

2019 Demand

This year the demand outlook for oil is looking solid, with prices rising to their highest levels in five months. A rebound has been observed in the world’s second largest economy, China, in terms of recent key data. The Chinese manufacturing sector moved back into expansionary territory after it had been contracting for some time. This came courtesy of the Caixin/Markit manufacturing purchasing managers’ index for the month of March.

Where Next for Oil Prices?

US oil weekly chart.

Given all that is noted above, with a particular focus on the significant cutbacks in supply, oil prices may still have some way to go higher. Looking via the weekly chart view, it is heading towards its first huge barrier of resistance. A former crucial acting zone of support is running from $64.00 up to $66.50, which provided comfort in the middle of 2018, particularly May through August. In proximity sees the 61.8% Fibonacci of the swing high on 1st October to the swing low on 24th December.

Should the bulls manage to break this down, eyes will be on a complete reversal of the 2018 drop, up to $76. It would mean oil still has some 20% in upside potential if bullish momentum maintains its current course. Looking further to the north, eyes would be on $85 territory, the next significant barrier. Oil last traded up at these heights in October 2014.

How to Invest in Oil

There are several options for getting involved in oil. All of the following noted methods come with varying degrees of risk. Each will have different exposure to the oil market; some may be a direct investment in oil as a commodity, others as an indirect exposure in oil through the ownership of energy-related stocks.

Futures – Firstly, owning oil can be done via the purchase of oil futures or oil futures options. There is a high degree of risk associated with futures; in addition, typically they require a chunky amount of capital.

ETFs – Elsewhere, oil can be owned via the purchase of commodity-focused oil exchange-traded funds. ETFs will trade on a stock exchange and can be transacted within an identical manner to stocks.

MLPs – An investor can buy into an MLP, which is a publicly traded partnership. If investing in an MLP, essentially you are becoming a limited partner. You will receive a share in profits, but will have no say in how the business is run.

Featured image courtesy of Shutterstock. 

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.