Investors can diversify their portfolio and enter into the oil market. They can invest in oil well, which is productive. Before diving in oil sector, you need to know five things.
Oil well investment is better
Investors interested in oil sector think that big oil companies are the safe and profitable route. Big oil companies possess a reputation for performing well and so stockholders can get their cut. Is this the right perception?
No, big oil companies use plenty of stockholder’s money in upkeep and overhead itself and not in oil. Investing funds in oil well means very little goes towards overhead, while lots in black gold.
Oil prices are same everywhere
Oil barrel price is same everywhere but oil amount in the well differs. Some are full, while others produce for some years. Therefore, it is crucial to be familiar with the operator’s reliability and success in exploring and discovering oil.
Actually, your investment profits heavily depend on the amount of oil in the well and the length of time it can be extracted.
No accountability, No concern
Oil well investment makes you liable to share the profits and loss but not be responsible for possible accidents at drill site. You gain ownership of the oil well but will not be concerned about responsibility like the oil well supervisors.
Therefore, if you are apprehensive about drill site responsibilities and refrain from investing in oil wells then there is nothing to be concerned about.
Oil well investment for huge tax benefits
More than 75% to 85% investments go directly of what is called, ‘Intangible drilling costs’. These include mud, chemicals, grease, and labour. These are needed to operate a well-oiled machine.
Most of the funds going in doing things which isn’t oil, seems less risky. Fortunately, every dime spent against intangibles is tax deductibles.
Oil well investment for better diversification
High oil prices are the main reason for economic hold up, which can trigger some volatility in your portfolio. Diversification is the best strategy. For example, an underperforming stock in your portfolio can get balanced with well served oil investment.
Alternatively, in low oil price environment, economic market picks up. Thus, in oil price rise and drop, your portfolio gets good protection.
Oil price driving forces
Oil market price fluctuates daily, so investors find it hard to decide. The driving forces, which influence oil prices, are –
Demand
Rise in oil prices decrease demand in the US, but demand from emerging market economies increases. Emerging market economies possess fuel subsidies, which can cause your country’s oil producers sell at loss during demand.
Supply
New reserve discovery is good but the ones that decline oil production can hinder the supply chain. A country under attack pumps less oil barrels, which can affect supply, demand, and price.
Quality
Lack of crude oil quality is the major issue oil market experiences. Refineries need to fulfil stringent environmental requirements in the US.
Speculation
Speculators and investors bid on the oil’s futures contract is another driving force influencing oil prices.
