You’ve likely noticed that gas prices are at the lowest level in years. And while that’s great news for consumers when they fill up their tanks, it’s presented investors in the oil and gas industries with a number of challenges.
For example, lower energy prices mean that the development of new natural gas extraction operations has come to a virtual standstill in the northern Midwest and western plains — areas which just a few years ago were experiencing explosive growth in these types of activities. In fact, some developers are choosing to “cap” or decommission their natural gas wells until market conditions improve.
As with any disfavored asset class, you’re faced with the question of whether the low price merely represents a buying opportunity, or if it means there’s been a fundamental shift in the circumstances surrounding that asset. Let’s examine some of the factors surrounding that discussion.
Types of Assets. There are a wide range of investment options in the oil and gas industries. You can make direct investments (in the form of equity or debt) in exploration and development companies, as well as in the companies responsible for refining the petroleum products.
It’s important to note that various types of investment in the oil and natural gas industries are structured with various tax advantages, and are therefore popular with investors who use their taxable accounts to invest. In general, those types of tax-advantaged investments aren’t suitable for holding within a self-directed IRA because investments within an IRA already benefit from a number of tax-advantages.
Furthermore, with respect to commodities such as oil and natural gas, there are ways to take a bearish investment position through various financial derivatives. Regardless of how you view the strength and future of the oil and gas industry, there are investment choices to suit your portfolio.
Non-U.S. Markets. Don’t make the mistake of focusing solely on oil and natural gas operations in the United States. Canada, for example, has a very large and well developed oil extraction industries, and other countries around the world continue to enter the market. Your self-directed IRA has no inherent geographical limitations on where you can invest.
Other Energy Investments. If you determine that the current market conditions are not conducive to your investing in the oil or gas industries, but you’re still bullish on other energy markets, you can still use your self-directed IRA to make those investments. For example, opportunities within the solar and wind power technology and development projects continue to grow and expand within the U.S., and around the world.
Regardless of what you decide, you need to be confident and comfortable that the risks inherent in your investments are a good match for your overall portfolio, as well as for your investing personality.