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How to Avoid the Risk of Investing in Oil Commodities

As with most aspects of commodities, tanker spot rates and fixed rates, which provide the bulk of a shipping company’s revenue stream, are highly cyclical. It’s not extraordinary for shipping rates to fluctuate by 60 or 70 percent on a daily basis.

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So how do you protect yourself from these extreme price volatilities? One way to hedge your positions is to invest in one of the large oil tanker stocks. These companies have been in the business a long time and have substantial experience managing these wild price swings.

Another factor to consider is global economic growth. The oil-shipping industry depends on a strong global economy with a healthy appetite for crude oil and crude oil products. If the global economy is thrown into a recession, you can expect the tanker stocks to take a hit. With everything else equal, if the world demand for oil products slows down, you should get out of these tanker stocks.

If you’re a more adventurous investor, you always have the option to short the stock of companies you know aren’t going to do well. You can short a company’s stock through various means, such as buying a put option or even selling a call option.

To find out more about the oil-shipping industry, check out Martin Stopford’s excellent book on the subject, Maritime Economics (Routledge).

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