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Stock markets have been volatile in 2020. Following the impact of coronavirus, a further market meltdown took place on Monday 9th March, triggered by a dispute between major oil exporters Russia and Saudi Arabia over oil production levels.
Russia had turned down an offer by oil exporting group OPEC to cut supply to cope with dropping demand. In response, Saudi Arabia said it would pump more oil (and in so doing cut prices further). This exchange sparked fears of a price war.
For some investors, falling prices are an opportunity. For those willing to take the risks, there is the potential to grab discounted oil stocks that are still good value – and will ideally rise.
As the current climate shows, oil can be very volatile. Its value is driven by supply, political and environmental factors, and the demand from high-energy-driven nations.
There are four main options for investing in oil:
- Buy oil stocks
- Buy oil ETF units
- Trade oil futures
- Invest in MLPs
Invest in oil company stocks
A simple way to invest in oil is through stocks of Canadian-based oil companies such as Suncor Energy Inc. (SU.TO), Imperial Oil Ltd. (IMO.TO) and Canadian Natural Resources Ltd. (CNQ.TO). Generally speaking, as the cost of oil changes, so will the value of these companies – although this isn’t guaranteed and depends on lots of factors.
The following companies are often tracked by investors in the oil industry. Check out our guides to learn more about how to invest in these companies or to find out about the latest stock prices.
Developing an understanding of the energy cycle, the landscape in the industry and the impact of price fluctuations will help you determine valuable oil-related assets.
Accessing the market this way is simple, because shares can be purchased with an online broker or financial advisor.
- You can pick and choose a range of stocks and cash out when you want.
- A simple, accessible and versatile way to access the market.
- Large businesses are involved in things such as refining, which don’t actually benefit from higher oil prices, so oil company stocks don’t necessary move lock-step with the price of the commodity.
- Oil stocks are regarded as being more volatile than other sectors.
Invest in oil ETFs
ETFs are another option worth considering. ETFs give access to a whole load of assets, without having to put all of your money into individual firms. The process is pretty much the same as buying stocks, but instead you’re buying an oil “ETF”, which typically tracks the performance of oil stocks.
If you need to brush up on ETFs, check out our guide on ETFs.
Purchasing commodity-based oil ETFs is a direct method of owning oil. ETFs can be purchased and sold in a manner similar to stocks. They allow investors to minimize risk, while taking advantage of the performance and general popularity of a particular sector. Oil ETF investors can avoid the risk of exposure to single stocks that fluctuate based oil prices.
In Canada, there are several resources-themed ETFs that are exposed to oil company stocks and the price of oil. These include:
- BMO S&P/TSX Equal Weight Oil & Gas ETF (ZEO)
- BMO Junior Oil Index ETF (ZJO)
- Horizons S&P/TSX Capped Energy Index ETF (HXE)
- Horizons Canadian Midstream Oil & Gas Index ETF (HOG.TO)
- iShares S&P/TSX Capped Energy Index ETF (XEG)
- ETFs allow for instant diversification across the oil industry, at a low price.
- ETFs have a better track record with providing safe, more reliable growth.
- By placing your money in an ETF, you relinquish some control over the split of assets.
Invest in oil futures
This is the most direct way to purchase the commodity without literally purchasing barrels of oil. In Canada, oil futures are purchased through commodities CFD brokers – many of which are available online. You are buying a contract to purchase oil at a future date at a specified price.
Futures are extremely volatile and riskier than other investment options. You have to be right on the timing and price movement.
- Oil futures are among the most actively traded future on the market and hence the among the most liquid.
- All futures are volatile investments and oil is no exception. No one can predict with any degree of certainty how the price of oil will fluctuate.
- Futures expire on a certain date. If you fail to exercise them prior to expiry they become worthless.
Invest in MLPs
Primarily existing in the gas and oil industry, A Master Limited Partnership (MLP) is a tax-advantaged corporate structure. It combines the tax benefits of a partnership – profits are taxed only when investors actually receive distributions – with the liquidity of a public company.
Typically, these companies own the pipelines that carry the commodity from one place to another.
Risks to MLPs could come from a slowdown in energy demand, environmental hazards, commodity price fluctuations, and tax law reform.
- Companies can offer a very attractive dividend payment.
- MLPs can easily be purchased through financial advisors or online brokers.
- MLPs are subject to general market risk and low energy demand.
- Stock prices don’t necessary move lock-step with the price of oil
Compare brokers to invest in oil stocks and ETFs
Compare brokers to invest in oil futures
What are the risks of investing in oil?
While long-term investments in oil companies can be highly profitable investors should understand the risk factors before making investments in the sector. These risks include:
- Price volatility: large price fluctuations can occur daily due to unpredictable influences such as supply and demand.
- Dividend cuts: If a company is unable to earn enough revenue to fund payments to investors dividend can be cut.
- Oil spill risk: Accidents such as oil spills can cause a company’s share price to drop significantly. In 2010, London-based oil and gas supermajor, BP, saw a decline of over 55% to their stock in the wake of the Deepwater Horizon oil spill.