How to Invest in Oil Options

By Taipan Greene | January 27, 2009

How to invest in oil is a subject of great interest to quite a few traders in a world economy that is largely dependent upon the price and availability of products derived from products obtained from crude oil, like gasoline, kerosene, diesel fuel, jet fuel, plastics, and fertilizer.

It is hard to envision a world in which these products are extremely expensive or not widely available at any price but that could be the case within a few years.

Peak Oil is a term that most investors are now aware of. Yet the meaning of peak oil is widely misunderstood. It does not mean that the world is nearing a time where there is no oil available. Rather it refers to the rapidly developing situation in the production of oil where the major oil fields of the world are in a state of production decline and even with new technology no major easy to access oil fields have been recently discovered.

In other words, the easy to find, inexpensive to pump, oil discoveries have already been discovered. There are important new oil fields, like the huge field 200 miles off the coast of Rio in Brazil, but the oil field is a very deep field indeed and the oil will be quite expensive to pump and transport to refineries.

After reaching the ocean floor some 6,000 feet down the oil is still about 4,000 feet below the ocean floor in vast reservoirs. That oil will be very expensive to extract. It will probably be at least ten years before any oil is produced and that will happen only with much higher sustained prices than current prices for crude oil.

Even with a brief study of the dynamics of the crude oil market investors will probably conclude that oil prices are headed higher, perhaps much higher, and perhaps in the not too distant future. We have already experienced a spike in oil prices to about $147 a barrel followed by a collapse to a low of about $33 a barrel. The big question is how much will the world recession cut into oil demand? So far the reduction in demand has been less than one might expect.

The question then is how to invest in oil if you are a typical investor with limited resources? If you attempt to trade oil futures contracts the volatility of the market and the margin required to purchase contracts make oil trading a high risk venture, out of the reach of many traders. Even if you have the required money to purchase and to hang onto your positions you may not be able to stomach the gut churning volatility.

There is a solution that you may wish to consider. Look in the resource box below.

There is a way to invest in oil that is still risky but at least if things go bad the amount of loss is known beforehand. See How to Invest in Oil

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