Investing In Oil Stocks

It is no secret now that while world oil reserves are decreasing, the demand for world oil is increasing. The current price of oil certainly reaffirms this statement. Logically speaking, investing in oil stocks should be a good long term investment.

Today, Venezuela, Saudi Arabia, Russia and Canada have the largest oil reserves. But political unrest in Venezuela and an unstable government in Russia make Canada the largest and most reliable oil reserves in the world.

Worldwide, industry and government stocks hold 7-8 billion barrels of oil at any given time. These oil stocks are needed to keep the global supply system operating smoothly. The tankers, the pipelines, the railcars, and the road tankers, all form the key to the oil industry’s proven ability to deliver the right product to the right location at the right time. Only about 10 percent of this vast stockpile is available to the industry to use as and when it pleases.

The oil stocks indicate if the markets have too little, too much, or just the right amount of oil. If the stocks are low in a particular market, the prices are likely to get relatively high, thus encouraging extra supply of oil or reducing oil demand. Projected oil stocks are a leading indicator of prices and are one of the most closely watched aspects of the oil market.

World oil stocks are observed to follow a seasonal pattern. They typically see a downturn in the middle of the winter while rebuilding high in the spring. The oil stock seasonality stems from oil demand being much more seasonal than oil production. Oil stock swings are most pronounced in those Northern Hemisphere. But with growing flexibility in refineries and less seasonal demand, oil stocks are becoming less seasonal too.

How much it costs to hold inventory depends on the type of oil being stored, storage available, the price of the oil, and the cost of borrowing money. Companies keep their inventories as efficient as possible by operating their supply and distribution systems in different ways.

Oil stocks investment should not be looked upon just as a cost of doing business. These stocks can also be used as a way to make money; they represent a profitable investment. Being truly discretionary, the oil stocks are built in response to the difference between today’s prices and expectations about where prices will be in the future. The forward price curve is easy to see, thanks to the widespread availability of financial instruments. This greatly reduces the risk of building oil stocks as an investment in a surplus market.

The oil market today is considered to be one of the most erratic, with an all time high oil prices and then succumbing to a depressingly low through the years. Thus, investing in oil stocks becomes quite challenging to investors, but also promises the best long term results. Holding your oils tocks can help buffer your losses in the event of a supply disruption. Experts predict that global oil production will peak despite the global financial crisis. Although it will be a head down from there, nobody is predicting a similar drop in demand.

One should remember that oil stocks investment is not as easy. Devising strong strategies is important to emerge a winner. Before hitting on the oil stock index, remember to:

1) Pick individual stocks and make sure first that you're prepared to live up to the “speed” of the movements in this industry. Oil stocks act so accordingly to the highly unpredictable oil prices.

2) To get the feel of the current events in this industry, subscribe an oil trade journal like Oil and Gas Journal Online to remain updated.

left quote Today, a skilled manager makes more than the owner. And owners fight each other to get the skilled managers. right quote

— Mikhail Khodorkovsky.