Investing in a commodity like oil can involve added investment risk, with the possibility of prices slipping all over the place due to volatility caused by supply and demand along with wider geographical and political challenges.
For those who are willing to wade through the risks, there is the potential to invest in commodities like oil, that could benefit from price rises due to a lowering supply and stable demand. Typically, there are 4 main options for investing in oil, which we’re going to explore, along with important factors to consider, the potential risks and details around the world’s biggest oil companies.
Like all commodities, there are several different ways that you can invest in oil, but these are suited to different types of investors. For example, options and futures aren’t suitable for beginner investors, who might prefer to invest in exchange-traded funds (ETFs).
A simple way to invest in oil is through stocks of oil companies such as ExxonMobil (XOM) or Chevron (CHV). 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.
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.
Exxon Mobil is an American oil and gas company. It’s a component of the S&P500 and is one of the world’s largest publicly traded companies and market capitalisation.
Exxon Mobil produces around 5.4 million barrels of oil equivalent every day. It has 21 global oil refineries.
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Chevron Corporation is an American energy corporation. It’s a successor company of Standard Oil and is now one of the largest companies in the world, making it onto the S&P500 index.
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BP is a British oil and gas company. It’s one of the original “supermajors”, which aren’t to be confused with superheroes, but instead are the 7 largest oil and gas dinosaurs. BP deals with exploration, extraction, refining, distribution, marketing, power generation and trading. It operates in 70 countries and produces around 3 million barrels of oil equivalent every day.
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Compare brokers to buy oil shares
Exchange-traded funds (ETFs) are another option worth considering. ETFs provide 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.
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 reduce the risks they take on, 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 on oil prices.
There are loads of oil-based ETFs to select from, covering a whole host of different companies within the industry. Oil ETFs can be a good choice for those who are new to investing, as well as those looking to secure their portfolio.
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This is the most direct way to purchase the commodity without literally purchasing barrels of oil. Futures are purchased through a commodities broker. 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. For example, the price of US oil futures dropped to negative $40 in April 2020 as a result of a market saturation due to the coronavirus pandemic.
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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 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.
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.
On Monday 20 April, the price of oil temporarily entered negative territory in the US due to expiring oil futures contracts, triggering another stock market slump. This was the first time in history that the price of oil went negative.
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:
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Oil is a pretty volatile commodity – it’s a totally different wavelength to standard stocks and shares. The price of oil is dependent on the supply and demand of the commodity, which is to say, how much of it is available and how much people actually want. When there’s more than enough oil to go around, oil companies have to make their oil more competitively priced and the price goes down, when there’s not enough of it for all the people that want oil, the price rises.
There are unique risks involved in investing in oil that you should make sure you are aware of before you invest.
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