If you're seriously debating an investment in oil, whether through a distributor, extractor or manufacturer, you probably know more than most investors that this industry is by far one of the more robust on the planet. Civilization literally cannot run without a daily influx of energy, and as a result, oil companies generally reap enormous benefits.
Yet the picture is not 100 percent rosy for the oil sector, as there are outside pressures that, while usually transitory, can result in periods of sub-par growth or revenue. In today's article, we'll look at events or conditions that can negatively impact the portfolio of an oil investor. The purpose of this exploration is to give investors a better idea of evaluating the risks of investing in oil and provide a foundation on which to develop a risk management strategy.
As the 2007-2009 financial panic showed, rapidly decreasing economic activity can have a profound impact on the price of a barrel of oil. This cost peaked at around $135 dollars a barrel on the eve of the crisis, before plunging to just under $40 dollars for the remainder of that year. It has since recovered to an average of $95. This shift shows not merely a weakness in the asset but an underlying possibility of sudden downward changes.
Most economists point to war as a price factor for oil, though the reality is that this event can swing costs either way. Some believe that oil is approaching $100 or more again as the Syrian civil war threatens to draw in Iran and the United States, a conflict that could result in the closure of the Strait of Hormuz and, most likely, skyrocketing oil prices. Add the fact that armed engagements tend to consume a lot of energy and investors could see these expenses climb dramatically.
At the end of the day, you need to use your best judgment when assessing risk, and this includes exploring an asset class like oil. Those who place a value on monitoring and, when needed, reacting to risk in a comprehensive way should look at SmartStops' array of portfolio management services that can give them a leg-up as they invest in the stock market.
Categories: Risk Management, Trading & Portfolio Strategies