How the Crude Oil Price Affects Investing
When the crude oil price falls, you might be tempted to run from crude oil investing. It’s understandable to sweat when others worry and the commodities market fluctuates.
But, that could be a short-sighted mistake.
You should always research before you buy into a drilling project, and we require our investors to educate themselves on investing in any crude oil price.
However, just because others panic doesn’t mean you should. You can still make sound investments in oil and gas with proper planning in a down market. In fact, with direct investments, lower oil prices can increase opportunities for investors.
Invest in the Well
The best investments in oil and gas involve investing in oil wells directly and to diversifying your oil investments across many deliberate opportunities.
That’s the EnergyFunders strategy. Even under depressed crude oil prices, investments can pay off.
Small independent producers and operators with little overhead, lower labor prices, and smaller infrequent rental prices can still turn a profit, and operate during a downturn. They can swim where the big fish can’t and acquire the assets that are uneconomic for the big fish to operate. (Meanwhile, the major oil companies will stay, but their profit margins and deployable capital will likely shrink.)
By investing in the well, you can negotiate deals that make sense under the new projected price of oil. Direct investing in oil wells allows you to profit in a much wider range of oil prices than when you invest in traditional, publicly traded oil and gas investments. With our platform, you have direct control. If oil prices surge, you make a windfall; if they don’t, you still can profit.
In any price environment, we recommend investing in more than one well. That’s why we allow smaller buy-ins with top-tier operators so you can increase your odds of having a well hit it big. No matter how oil prices fluctuate, you’re making sure that your diverse portfolio has the best possible chance for success.
You can also diversify your portfolio across various energy investments including buying into natural gas wells, mineral funds, and unconventional drilling funds in addition to direct crude oil wells.
A diverse portfolio with direct oil and gas investments (and perhaps oil stocks) acts as a buffer against short-term volatility. Plus, when you invest into oil and gas directly, you are buying real assets that give you tax benefits and potential high returns for many years.
But What About Oil Stocks?
Didn’t Warren Buffet say to buy when everyone else was selling?
In some situations, it can make sense to buy oil stocks. If you feel the price will rebound back up to $100 a barrel, then you can buy before it does. A stable company has its value tied to the price of oil and will rise in value when the commodity it produces increases in price.
Oil companies with cash on hand will be able to buy oil fields at a cheaper rate when the oil price is low, just like you can invest directly in oil and gas projects at a better rate. When crude prices recover, you can profit on your oil stocks.
However, we give a word of caution about investing in companies with depressed stock due to lower crude prices. You could get stuck with losing oil stocks even when prices rise if (a) the company exhausts its reserves with lower oil prices in effect, (b) doesn’t have the cash to buy oil fields cheaply while prices are low, and (c) doesn’t have reserves to produce when prices surge.
So, What Does the Crude Oil Price Mean When Investing?
Prices are low today ($50 per barrel WTI), but tomorrow, prices could be high — fluctuations and cycles are ubiquitous parts of the industry.
Smart investors negotiate a deal or buy into a deal that makes sense with the lower crude oil price. By continuing to invest in oil wells directly and diversifying your portfolio, you set yourself up for a potential windfall. Even if prices don’t surge soon, you still have plenty of margin to profit.