Are you looking to make money off of commodity prices? First, let me ask you a very simple question. When you think about earning money off of investing, what are the first few words that come to mind? There’s a great chance that stocks and bonds are the first terms that pop up. That’s great, and both stocks and bonds are excellent investment vehicles. That being said, there are many other options out there.
Investing in Commodities
Commodities refers to raw materials and other similar inputs. Oil, gold, rice, wheat, and coal are examples of commodities. The list could go on and on, but you probably get the idea. These commodities are now bought and sold on the global market. If you happen to live in the United States or somewhere else in the so-called West, take a look at the bags of rice in your local grocery store. You’ll probably find bags from India, Thailand, and elsewhere. The gasoline being pumped into your car might have come from Canada, a country in the Middle East, Russia, Venezuela, or somewhere else.
This global trade of goods creates opportunities for investors to invest in commodities. You can do this through a variety of ways. For example, when it comes to gold you can buy gold itself, investment instruments based off of gold, gold futures, and other things. When it comes to something like wheat, as an investor you probably won’t want to buy bushels of wheat directly (though you could if so inclined), but there are other options.
How to Profit Off of Changes in Commodity Prices
So how can you invest in wheat without actually buying wheat? In other words, how can you profit off of changes in farm commodity prices? Perhaps the most common way is to invest in futures. Futures are basically contracts in which buyers and sellers agree to exchange something at set prices now. This allows the buyer to secure a steady supply at a known price, and it allows sellers to secure money.
Futures can be bought and sold for just about any commodity. They allow you to make (or lose) money off of price movements. A lot of people prefer investing in futures rather than stocks because they prefer analyzing industries and economic trends, rather than individual companies and consumer tastes. Either way, every investor should consider commodity futures as a part of their portfolio.
Investing in the Most Popular Commodity: Crude Oil
Oil is perhaps the most popular commodity to trade. As of January 2016, crude oil prices are at historical lows, selling below $30 dollars a barrel. It’s been more than a decade since oil has sunk to such low levels. Concerns over a slowdown in China, stagnant demand in Europe, and the discovery and exploitation of new oil sources have all pushed prices downwards. On top of that you can add in politics, such as the rumors that Saudi Arabia is keeping oil commodity prices low in order to put pressure on Iran.
Crude oil prices are now historically low, and many people are undoubtedly considering buying oil. What goes down must come up, right? Actually, when it comes to investing this belief can be a bit of a trap. Often, prices drop because of serious problems and issues that could keep prices from ever rebounding. When it comes to oil, however, prices most likely will rebound at some point in the future.
The current commodity prices for oil are set by current supply and current demand. Right now demand is low because the global economy is slowing down. At the same time, supply is high. High supply plus low demand means low prices. Right now, oil is cheaper to buy than it has been in years. So should you buy some petro futures? Prices have to rebound eventually, right?
The Question to Ask: When Will Oil Rebound?
Oil is simply too integral a part of the global economy, and the supply of oil is ultimately limited for oil to stay down forever. The question, however, is when will oil rebound. This year? Next Year? Five years from now? As an investor it’s your job to figure that out. Most oil futures have an expiration date set, at most, seven or eight years in the future, and most futures that are actually traded actually have expiration dates that are only a few months, or perhaps a year into the future.
So will oil prices rebound? At some point, most likely. The question for you as an investor is when. If oil prices spike in a few months, and you buy futures now, you could reap huge profits. If prices drop, however, you’ll lose money. When oil prices first dropped below $50 dollars a barrel, a lot of investors thought oil would quickly rebound and bought up futures. Since then, however, oil prices have only continued to decline.
The trick to investing in commodities is to look at current commodity prices and to find opportunities to buy commodities that will rise in the future. In order to do this, you have to look at the factors impacting a commodity’s price. For example, the slow global economy is suppressing oil, and oil prices likely won’t rebound until the economy does.