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How to invest in oil in India

4 ways in India to slip this valuable commodity into your portfolio.

Invest in oil through a broker Compare online brokers

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Oil is a volatile commodity in India and around the world. Its value is driven by supply, political and environmental factors — and the demands of energy-driven nations. There’s no telling which direction the oil supply of other oil-producing countries will go, and the Middle East is no stranger to conflicts that disrupt the oil industry.

Each of the four investment options available for this commodity comes with risk, given you’re making a bet as to how much oil will sell for.

How do I buy oil stocks?

  1. Pick a trading platform. If you’re new to investing, our comparison table can help you narrow down your options.
  2. Open an account. Be ready to supply your personal details, government-issued ID and bank account information.
  3. Fund your account. To invest, you’ll need to fund your account with a bank transfer.
  4. Find oil stocks. Use a stock screener to pinpoint stocks by company name or ticker symbol.
  5. Submit your order. Once you’ve found a stock you like, indicate how many shares you’d like to purchase and submit your order.
  6. Track your investments. Log in to your brokerage account to track your portfolio’s performance.

Invest in oil company stocks

A simple way to invest in oil is by buying stocks of oil companies. There are a number of India-based oil exploration and production companies listed on Indian stock exchanges like the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE), including:

  • Aban Offshore Ltd (ABAN)
  • Bharat Petroleum Corporation Ltd (BPCL)
  • Chennai Petroleum Corporation Ltd (CHENNPETRO)
  • Hindustan Oil Exploration Company Ltd (HINDOILEXP)
  • Hindustan Petroleum Corporation Ltd (HINDPETRO)

As the cost of oil changes, so do the values of these companies — although there’s no guarantee, given the factors they depend on. Understanding the energy cycle, the industry’s landscape and the impact of price fluctuations can help you determine valuable oil-related assets.

Pros

  • Choose from a range of stocks, and cash out when you want.
  • Access the market through an online broker or financial adviser.

Cons

  • Large oil companies are involved in refining, which doesn’t benefit from higher oil prices, and so stocks aren’t necessarily in lockstep with the price of the commodity.
  • Individual stocks can be more volatile than diversified ETFs.

Invest in oil exchange-traded funds (ETFs)

Worth considering are ETFs, which provide access to a variety of assets without putting all of your money into individual stocks. Rather than buying a stock, you’re buying an oil ETF, which typically tracks several oil stocks’ performance.

Purchasing commodity-based oil ETFs is a direct way to invest in oil. ETFs allow investors to minimise risk while taking advantage of the performance and general popularity of a particular sector. And oil ETF investors can avoid the risk of exposure to single stocks that fluctuate based on oil prices.

Oil ETFs can be a good choice for those who are new to investing or looking to diversify their portfolio. Unfortunately, there is no oil ETF listed on Indian stock markets at the time of writing.

If you are interested in investing in oil ETFs, you need to turn your attention to international markets such as the US stock market. Please note that you will also need a brokerage account that offers access to US or global stocks.

In the US, you have many oil-based ETFs to choose from, covering many companies in the industry. Here are some of the more popular options.

  • US Oil Fund (USO): An ETF that directly tracks the price of oil through futures contracts on the benchmark West Texas Intermediate (WTI) crude oil.
  • ProShares Ultra Bloomberg Crude Oil (UCO): A leveraged ETF that tracks the price of WTI crude oil and aims to double the daily price movements.
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP): An ETF that tracks an index of the stocks of oil producers and explorers.
  • VanEck Vectors Oil Services ETF (OIH): An ETF that tracks an index of the stocks of companies that provide support services to oil producers and explorers.

Leveraged ETFs

If you’re considering a leveraged oil ETF like UCO, be careful. Leveraged ETFs are not designed to be bought and held for long periods of time — rather, they’re designed for short-term trades.

To achieve double or triple the returns of the futures or stocks they’re based on, these ETFs invest in options and derivatives that require a daily rebalancing of the ETF’s assets and target exposure. Therefore, the asset base is constantly changing, and extreme volatility can erode the basis of your investment.

Pros

  • Instant diversification across the oil industry at a low price
  • Track record of providing safe and reliable growth

Cons

  • You relinquish some control over the split of assets
  • Leveraged ETFs are designed only for short-term trades, not buy and hold

Trade in oil futures

Futures are the most direct way to purchase this commodity without literally purchasing barrels of oil, but they’re a more advanced and complex investment option the majority of brokerage accounts don’t offer. In India, you buy a futures contract through a commodities broker to purchase oil at a future date at a specified price. Purchases must take place before the contract expires.

Futures are extremely volatile and riskier than other investment options. You must be correct on the timing and price movement to see a profit. If you’re interested in futures, you’ll first have to choose a brokerage account that supports futures trading.

Pros

  • Most actively traded future on the market — and the most liquid

Cons

  • Requires a specific brokerage platform that offers futures trading
  • Volatile investment without ability to predict with certainty how prices will fluctuate
  • Worthless if you fail to exercise your contract prior to its expiration.

Invest in master limited partnerships (MLPs)

Existing primarily in the gas and oil industry, a master limited partnership is a tax-advantaged corporate structure in the US that combines the tax benefits of a partnership with the liquidity of a public company. Like a partnership, profits are taxed only when investors receive distributions.

MLPs typically own the pipelines that carry the commodity from one place to another, and they are known for paying high dividends, which makes them a popular option for investors who are seeking a long-term stream of income. MLPs are still volatile, though, and risks could come from a slowdown in energy demand, environmental hazards, commodity price fluctuations and tax law reform.

Similar to the popular options of oil ETFs, MLPs are also available in the US market. You’ll find MLPs listed in a US brokerage account just like stocks and ETFs. Here are a few of the biggest ones:

  • Energy Transfer (ET)
  • Enterprise Products Partners (EPD)
  • Brookfield Property Partners (BPY)
  • MPLX (MPLX)

Pros

  • Offers an attractive dividend payment
  • Purchase easily through financial advisers or online brokers

Cons

  • Subject to general market risk and low energy demand
  • Stock prices aren’t necessarily in lockstep with the price of oil

Compare platforms to invest in oil

Name Product Number of stocks CFDs Shares Available Markets Link
Axis Direct
All NSE/BSE listed stocks
No
Yes
IN
Go to site
More info
Get brokerage cashback of up to Rs 500 on trades done online through Axis Direct website, Swift Trade, or Mobile app. Grow your investment portfolio and maximise your gains with AxisDirect’s 3-in-1 demat, trading and savings account.
Saxo Bank
19,000+
Yes
Yes
AU, CN, CZ, DK, ES, FR, TW, HK, IT, HU, SA, NE, NO, PL, RU, SG, CH, UK, JP
Go to site
CFD service. Your capital is at risk.
More info
CFD Service. Your capital is at risk.
Trade 40,000+ financial instruments at market-leading prices with this powerful yet intuitive trading platform.
Zacks Trade
Access to global markets
No
Yes
US, AU, ES, FR, HK, IT, NO, RU, SG, CH, UK, JP, MX, DE, CA, AUT, BEL, NL, SE
Go to site
More info
CFD Service. Your capital is at risk.
Trade stocks, bonds, ETFs, options, and more on 90+ international exchanges. Offers customisable trading platforms with over 120 technical indicators for your charting needs.
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Compare up to 4 providers

What are the risks of investing in oil?

While long-term investments in oil companies can be highly profitable, understand the risk factors before making investments in the sector:

  • Price volatility. Wide price fluctuations can occur daily due to unpredictable influences like supply and demand.
  • Dividend cuts. If a company is unable to earn enough revenue to fund payments to investors, it may cut dividends.
  • Oil spill risk. Accidents can cause a company’s share price to drop significantly. In 2010, London-based multinational oil and gas company BP saw a decline of more than 55% to its stock in the wake of the Deepwater Horizon oil spill.

Bottom line

Get involved in oil through four main methods, each with its own set of risks. Before you buy, explore investment options for other tangible goods through multiple trading platforms.

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.

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