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January 5, 2010
Investing in Oil Stock

As the world’s economy begins to right itself, investing in oil stock is getting attention. Investing in oil stock can be done by buying shares of the largest US based oil producers, Exxon Mobile, Chevron, and ConocoPhillips. Investing in oil stock can also mean investing in stock of companies that drill for oil, ship oil, refine oil, put out oil well fires, and repair damage to deep sea oil rigs. Political instability in the Middle East tends to drive up oil prices as does rising demand from the growing economies of China and India as well as the recovering economy in the United States.

Investment opportunities in the oil industry depend upon many factors. Crude oil has risen from its recent lows as demand has increased. Anti-government demonstration in Iran and violent police response puts into question the stability of this large oil producer, driving up spot prices for oil. A rising price of oil improves the prospects of oil company common stocks as well as stocks of the support and supply companies in the industry.

Investing in oil stock and stocks related to the energy industry can be very profitable. However, a basic knowledge of what kinds of companies support the oil industry is necessary. For example, when there are hurricanes in the Gulf of Mexico there can be damage to deep sea oil rigs. Repairing these structures requires complicated machines, robots, capable of operating a great depth. Thus, when a hurricane approaches, the stock prices of companies that make these machines go up as the commodity price of oil goes up. Likewise when there is the danger of a hurricane in the Gulf of Mexico oil rigs may be purposely shut down and refineries closed. What that happens Canadian oil and natural gas producers may sell more of their products into the United States and their stock price may go up.

How do you anticipate an increase in the value of oil stocks? Anything that indicates economic recovery may predict an increase in energy demand and, thus, a rise in oil stock prices. For example, a recent report by Master Card that retail sales increased over the holiday shopping season sent traders out to buy stock in oil companies or buy options in the same. Likewise, the shares of drillers and of well operators go up as a growing economy predicts an increased use of oil. Buying stock in the extensive support network of the oil and gas industry will often be as profitable as buying the major producers.

During times of economic recovery investing in oil stock will typically lead to more profit than investing in the stock market in general. When a company discovers a new large pool of oil their stock price increases. However, developing a large oil field takes time and projections may not work out. Thus traders in the company’s stock may do as well buying puts as buying calls. Sometimes, when an oil company’s stock price is quite volatile, a long straddle is an excellent option choice. In this case the options trader will benefit from stock movement in either direction and the trader’s risk is limited to the price of the premiums on the options contracts. Option investing in oil can be quite profitable and require less capital investment than buying stock outright.

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