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Stock markets have been volatile in 2020. Following the impact of the 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:
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
A simple way to invest in oil is through stocks of oil companies such as BHP (BHP), Woodside Petroleum (WPL) or Oil Search (OSH). 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.
Accessing the market this way is simple because shares can be purchased with an online broker or financial advisor.
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.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 minimise 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 South Africa there are a couple of resources-themed ETFs that are exposed to oil company stocks and the price of oil listed on the JSE. These include:
You can also look at international exchange-traded funds on other marketplaces if you want to diversify your portfolio, as long as your broker sells global stocks.
This is the most direct way to purchase the commodity without literally purchasing barrels of oil. In South Africa, futures are purchased through a commodities CFD broker – 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.
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.
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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