Risks that affect your chances of executing a successful trade in the oil business.

The whole concept of investment is built on making a profit while ensuring cost is at the possible least. The oil trading sector is no different from any other form of investment. And just like the other sectors, the investment sector also faces a variety of risks. Risk is basically the likelihood of running a loss in an investment. According to the principles of economics, the higher the risk, the greater the reward. This is why, although the oil sector has the potential to pull large profits, it is also accompanied by a number of risks. Risks are of a wide variety, with each one being completely different from the next. In general, businesses face management risk, which is a risk caused by taking incompetent managerial decisions which could hinder the investment engine. However, there are other more specific risks that are peculiar to the oil industry. These risks are the ones that can cause variations in the prices of oil in the open market. They include:


  • Government policies.

Unless you as an investor are part of an administration’s cabinet, you may not be able to properly predict what plans and changes are underway. These policies could affect oil in so many different ways. However, the major way it affects oil is its regulation. In the practical aspect of it, oil companies are limited by the government on when they can extract, how they can extract, and the location. These regulations can also differ in different regions of a country. However, the risk becomes more evident when the deposits being worked upon are abroad. Naturally, oil companies have a preference for countries with stable political laws on oil exploration. However, others would go anywhere in search of oil. Some of them end up going to counties that do not meet their pre-set requirements in the political scene. The resultant effect is that these companies end up with terms different from what was originally set mostly with a previous government. When this happens, the result is disastrous for the prices of oil coming from that region and this may take a toll on the overall prices being traded upon. Luckily, there is a way to minimize this risk. This is the same principles that is applied by the traders on, based on studies. With careful analysis of past governmental trends and the changes in the oil laws of the land, predictions can be made on if political turmoil will be a problem in the future.


  • Economic risk.

The economic risk factor is quite different from the political aspect. This covers the economies of oil production, extraction, and its prices. The price of oil is highly volatile because of several factors. Among these are the ease of extraction and the forces of demand and supply. Some areas have specific geological factors which compound the cost of extraction. Seeing as extraction companies are also in the business to make money, this effect tells on the price of barrels in the open market. And in cases where the prices drop, these companies are faced with the cost being above the selling price. The implication of this is an economic loss on their part. This is why investors usually factor in the economic risks right from the inception of the exploration project. Thus, they will be able to manage the risks they face.

There is no exact way to be completely insulated from these risks and several others which the oil industry faces. This is why several studies and forecasts from professionals are required for any oil-related expedition. Because these studies can make calculated predictions, which in turn helps investors to minimize their risks, keeping the prices of oil at a steady pace.

Back to top button