Investing in oil is sometimes a bit intimidating because the prices can rise and fall, seemingly without much reason. It is imperative investors fully understand the reasons behind the rise and fall of oil prices so they will be able to make a sound investment and know when to sell for a profit. Although the market is constantly changing, when investors know what they are looking for, they will feel much more confident in approaching the market to make a purchase.
It is important for investors to first realize oil is a commodity. The Organization of Petroleum Exporting Countries commonly referred to as OPEC, is one of the biggest factors involved in whether oil prices rise or fall. OPEC is operated by 13 countries and owns around 40% of the world’s oil supply. They decide on the level of production to be able to fully meet the oil demands of the world. OPEC is able to influence the price of oil by their level of production.
Although this idea is important to understand, investors also need to realize the price of oil is determined by supply and demand, just as it is with any commodity. When the demand for oil is greater than the supply that is available, the price per barrel will increase. When the supply is more plentiful than demand, prices drop. When investing in oil, it is imperative an investor keeps a keen eye on OPEC and their production levels so they can be sure they are making a sound purchase. Other factors that influence the price of oil include:
- Futures contracts, which are binding agreements that allow a buyer to purchase a barrel of oil at the agreed upon set price.
- Production costs can also be a determining factor in the price of oil per barrel.
- When natural disasters occur, this can halt oil production and cause a dramatic increase in the price per barrel.
Keeping these factors in mind will allow investors to make sound decisions on buying and selling oil stock. It takes a constant level of research to ensure an investor is kept abreast of any changes that might affect the price.