When you get into investing, every decision you make can have complicated and potentially widespread outcomes. Establishing a framework for reasonable returns on your investments starts with selecting the right asset class for you. Commodities such as gold, silver, oil, and gas have seen considerable rises in demand.
Thanks to strong price increases in crude oil, particularly in the early 2000s, oil and gas have gained a lot of attention. As crude gradually approached $100, investors have increasingly switched gears and started putting their money into energy, hoping for quick profit, as demand continues to increase for the limited supply of natural gas and oil.
A more recent drop in oil prices below $100, combined with comments from the chief of OPEC that suggest the likelihood that prices will not reach previous highs in the near future, have caused many investors to rethink these decisions and question, whether oil and gas are really worth the continued attention.
Investing in oil and gas
Before you ever invest a dime in oil and gas, you must understand the basic dynamics of the sector, because that is what determined your investment prospects.
Recent reports from the International Energy Agency indicates that the current decline in oil prices is likely to lead to a decrease in investments in this sector and could even lead to shortages in the future. Demand for energy is expected to grow by more than a third over the next twenty-five years or so, making these potential shortages especially worrisome.
According to the IEA, the rise in demand for oil and gas will cause prices to hold their position, and these prices are almost certain to reflect the imbalance in supply and demand over time.
To put it simply, three primary factors influence oil and gas prices:
- International supply and demand,
- Future global investment prospects, and
- Policy actions taken by both top producers and main importing nations.
Emphasis on sources of renewable energy is on the rise, but oil and gas are still important assets, and pricing outlooks are bound to influence your decisions regarding investments in this area.
Supply and demand
It could be argued that investments in oil and gas are more dependent on supply and demand than any other asset class. This is primarily due to how heavily oil and gas pricing depend on supply and demand on a daily basis.
Studies by OPEC (the Organization of Petroleum Exporting Countries) indicate that global demand, particularly demand from emerging nations, is on a course to increase and bolster prices in the near future. This is certainly a primary factor that investors should heed, as fluctuations in pricing are contingent on this critical element.
The other critical element investors need to pay attention to is the supply of these resources. A number of new reports have focused on supply concerns and how they have influenced a rise in prices, or in actions taken by OPEC to control prices by cutting supply. If you’ve ever questioned why supply factors so heavily into prices, it’s because a small group of nations happens to control the majority of oil. Because of this, these nations are able to directly influence pricing.
[Photo used for the featured image: "Bóbrka, Muzeum Przemysłu Naftowego i Gazownictwa / Museum of oil and gas industry foundation, Poland” by Ministry of Foreign Affairs of the Republic, used under CC BY-NC / Color filters added, image cropped]