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The value of oil is driven by supply, political and environmental factors and demand from high-energy-driven nations. As the current climate shows, oil can be very volatile. For some investors, falling prices are an opportunity, and 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.
There are four main options for investing in oil:
Buying stocks in oil companies is one of the most straightforward ways of investing in oil. You can get broad exposure to the oil industry by investing in companies from some of the largest oil producing nations in the world like the United States, China, India and Japan. Major Canadian oil companies include Suncor Energy Inc. (SU.TO), Imperial Oil Ltd. (IMO.TO) and Canadian Natural Resources Ltd. (CNQ.TO).
To buy and sell oil stocks, you need to open a stock trading account through a major bank (like Scotia iTRADE or CIBC Investor’s Edge) or an online brokerage (like Wealthsimple or Interactive Brokers).
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. Futures are mostly traded by experienced investors and institutions only.
ETFs hold stocks in many companies, providing wider access to the market and less risk than if you invested in individual companies. Some ETFs track a wide range of sectors and industries, while others focus on specific types of businesses or commodities. You can buy and sell units of an ETF like you would stocks on an exchange.
In Canada, there are several resource-themed ETFs that are exposed to oil company stocks and the price of oil. These include:
Primarily existing in the gas and oil industry, an 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.
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:
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