Market Overview

5 Steps To Investing In Oil

5 Steps To Investing In Oil

As much attention as new energy sources might get in the media these days, one look at the headlines and the market news makes its fairly clear that oil is still king. Even with recent economic turbulence, crude oil prices are still at nearly four times their price from a decade ago and oil companies are clearly reaping the benefits.

For people outside the industry looking to invest in oil, however, it's not necessarily obvious how to get a piece of this pie.

Clearly, companies like ExxonMobil (NASDAQ: XOMand Shell (NASDAQ: RDS/Aare publicly traded and make for decent investments on some level, but stocks do not necessarily move in line with oil prices, dependent as they are on market perception of the company.

There are also exchange-traded funds and other investment vehicles that are tied more directly to oil prices, but these funds are not paying out dividends when prices are high - they are only worth whatever you manage to get when you decide to sell.

For those looking to benefit more directly from the oil industry, however, there is a riskier but much more profitable alternative – direct investing in oil wells. By helping to fund drilling efforts, investors can earn an ownership share in a well and a proportionate share of any resultant revenue from oil sales, providing income with direct relationship to current oil prices.

What does it take to invest in oil wells?
While the idea of direct investment is enticing, it takes a bit more work than simply buying stocks:

  1. Be sure you make the cut- Unlike most assets, investing in oil drillingis not available to everyone. These arrangements are only available to accredited investors - people with a net worth of at least $1 million disregarding home value, or with an individual income of at least $200,000 per year (or a combined income of $300,000).
  2. Study the industry- It might seem obvious, but direct oil investing requires greater understanding of the oil industry and drilling than simple stock or ETF investments would require. Investors should be able to understand the presentations given by companies, so as to help determine the best targets for new oil drilling and to better judge different firms.
  3. Pick your risk - Obviously, investing in oil wellsis a riskier move than many other options, but there are also degrees of risk within that approach. Investors must decide what type of well they want to invest in, whether it is a more speculative wildcat operation or a more reliable developmental well.
  4. Find a reputable investment option- Plenty of investors have been contacted by or seen advertisements from oil companies looking for outside investors to help fund drilling. Often these outfits are the ones most associated with fraud, as they are either lower-quality or higher-risk. Instead, either find a well-establish drilling company through contacts or with a reputable oil investment site.
  5. Read the terms and take the plunge- All direct oil investments should be liability- free for investors, but before writing any checks investors should read over any agreements to make sure they follow standard practices.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Commodities Markets Trading Ideas


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