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How to invest in oil in Canada

Investing in oil is simpler than you might think, and this guide explains the best ways to do it.

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.

How to invest in oil

There are four main options for investing in oil:

  1. Buy oil stocks
  2. Buy oil exchange traded fund (ETF) units
  3. Trade oil futures
  4. Invest in master limited partnerships (MLPs)

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1. Invest in oil stocks

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).

Pros
  • Choose from among a wide range of companies
  • Cash in by selling your stocks whenever you want
  • Straightforward and versatile way of accessing the oil industry
  • Stocks may yield higher gains than ETFs, if you choose the right stocks and trade at the right time
Cons
  • The oil industry can be volatile
  • Diversification is not built in to individual stock investments, so price swings can have a greater impact on your portfolio than if you invest in ETFs or mutual funds

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2. 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. Futures are mostly traded by experienced investors and institutions only.

Pros
  • Oil futures are among the most actively traded future on the market and hence the among the most liquid.
Cons
  • 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.
  • Futures are an advanced trading instrument and should only be traded by an experienced investor.

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Disclaimer: Trading in financial instruments carries various risks, and you can lose more than your capital. This article may contain general advice. You should always seek professional advice when deciding if a product is right for you.

3. Invest in oil exchange traded funds (ETFs)

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:

  • 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)
Pros
  • Easy way to diversify your oil investments
  • Often comes with lower fees than mutual funds
  • Generally regarded as offering safer, more reliable growth than individual stock investments
  • Bought and sold on exchanges like stocks
Cons
  • Less control over the choice and diversification of your assets than individual stock investments

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4. Invest in master limited partnerships (MLPs)

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.

Pros
  • Companies can offer a very attractive dividend payment.
  • MLPs can be traded on an exchange, so they can easily be purchased through financial advisors or online brokers.
Cons
  • MLPs are subject to general market risk and low energy demand.
  • Stock prices don’t necessary move lock-step with the price of oil.
  • MLPs have no built-in diversification compared to a security that invests in many companies, such as an ETF.

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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.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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