Crude Oil: Invest Now?

How do I invest in crude oil right now?

Crude oil is a vital natural resource for the world economy. It is a non-renewable fossil fuel with a limited total supply. As such, investing in crude oil can be a lucrative opportunity, but it also comes with risks. Here are some ways to invest in crude oil:

Oil Stocks and Mutual Funds

Oil stocks and mutual funds are a common way to gain exposure to the oil market. You can invest in oil-related stocks, such as companies involved in the extraction, production, transportation, and refining of crude oil. Mutual funds, like energy-sector ETFs, can provide diversification and reduce the risk associated with investing in individual stocks.

Oil Futures

Oil futures are contracts where two parties agree to exchange a set amount of oil at a set price on a future date. Trading oil futures does not involve taking physical possession of the oil, and it can be a risky endeavour due to the volatile nature of oil prices.

Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)

ETFs and ETNs offer a way to invest in crude oil without directly trading oil futures. These products typically invest in oil futures contracts and can provide closer tracking to oil prices than energy stocks. However, they may be subject to tracking errors and are suitable primarily for short-term speculation.

Indirect Exposure

You can also invest in crude oil through indirect exposure by owning various oil companies or sector funds. This approach can provide diversification and potentially lower risk compared to direct investment in oil futures or stocks.

When investing in crude oil, it is important to consider the risks, including the impact of global economic growth, geopolitical issues, and fluctuations in supply and demand. Additionally, it is crucial to do your own research or consult with an investment professional before making any investment decisions.

Oil stocks

There are several well-known oil stocks that frequently trade for under $100 a share. Examples include:

• Exxon Mobil
• Chevron
• ConocoPhillips
• Schlumberger
• EOG Resources
• Occidental Petroleum
• TotalEnergies
• BP

ETFs and mutual funds offer diversification within the energy sector, which is important because oil stocks come with their own risks. For example, in the spring of 2020, oil prices collapsed when the coronavirus pandemic began. Oil refineries weren't buying as much oil, and investors trading oil futures couldn't find anyone to buy their contracts. Oil prices temporarily fell into the negative, meaning investors were willing to pay to get rid of their contracts.

Before investing in oil stocks, it's important to research the company thoroughly. It's generally a good idea for the majority of a portfolio to be invested in mutual or index funds, rather than individual stocks, due to the diversification that funds provide.

Mutual funds

• Vanguard Energy Fund Investor Shares (VGENX): This fund was established in 1984 and seeks to provide long-term capital appreciation by investing at least 80% of its fund assets in the common stock of companies primarily engaged in activities related to the energy industry. As of June 30, 2021, it managed $4.8 billion in investor assets and had a 10-year annualized return of -2.69%. It has a relatively low expense ratio of 0.37%, and while a minimum initial investment of $3,000 is required, there is no upfront or deferred sales load.
• Fidelity Select Energy Portfolio (FSENX): Managed by Fidelity Investments, this fund has been available to investors since 1981. It invests a minimum of 80% of its fund assets in securities of companies engaged in energy field activities, including oil, gas, electricity, coal, and new sources of energy. It has a 10-year annualized return of -2.08% and an expense ratio of 0.85%. Shares are available without load or deferred sales charges, and there is no minimum investment. Top holdings include Chevron and Exxon Mobil.
• BlackRock Natural Resources Trust Fund (MDGRX): Established in 1994, this fund seeks to provide investors with long-term capital growth by investing the majority of its assets in securities of companies with substantial natural resource assets. As of June 30, 2021, it has generated a 10-year annualized return of 0.82% with an expense ratio of 1.26%. An upfront sales load of 5.25% is required for new share purchases, and a minimum investment of $1,000 is necessary for both qualified and non-qualified accounts. Top holdings include Chevron Corp and TotalEnergies.
• Integrity Mid-North American Resources Fund (ICPAX): Offered through the Integrity family of mutual funds, this fund seeks to provide investors with long-term capital appreciation by investing primarily in the stock of domestic and foreign issuers participating or benefiting from the development of resources in the Williston Basin area. It has generated a 10-year annualized return of -2.23% with an expense ratio of 1.50%. A 5% upfront sales charge is required for all new investments, and a minimum of $1,000 is needed to purchase shares. Top holdings include Cabot Oil and Gas, and Phillips 66.

It is important to note that investing in the oil industry comes with significant risks. Oil prices are highly volatile, and the industry is subject to various factors such as global supply and demand, geopolitical events, and the development of alternative energy sources. Before investing, be sure to do your own research or consult a financial professional to understand the risks involved.

Futures

When investing in futures, you are trading the contract itself, not the oil or underlying commodity. If the price of oil rises, the contract may become more valuable and the owner of the contract could sell it for a profit. However, if the price of oil falls, the contract could lose value and the owner could lose money.

In the spring of 2020, the oil futures market collapsed when the coronavirus pandemic began. Oil refineries weren't buying as much oil, and there was a backlog. Investors couldn't find anyone to buy their contracts and dropped their prices to try and entice buyers. In April 2020, oil prices fell into the negative: the futures contract for West Texas crude oil was minus $37.63 a barrel.

Oil futures can be a risky investment, but they can also be profitable. If you are interested in trading futures, proceed with caution.

ETFs

Exchange-traded funds (ETFs) are a popular way to invest in crude oil. ETFs are a type of fund that invests in companies involved in the oil and gas industry, including discovery, production, distribution, and retail. They allow investors to gain exposure to the oil market and potentially profit from a boom. Using an oil ETF helps reduce the risk of having the correct thesis (i.e., that oil demand and prices will rise) but selecting the wrong oil stock investment to express that view.

There are two main types of oil ETFs: oil price-focused ETFs and broad oil stock-focused ETFs. Oil price ETFs aim to provide investors with direct exposure to the rise and fall of oil prices by tracking the daily movement of a common oil price benchmark, such as West Texas Intermediate (WTI) or Brent crude. Oil stock ETFs, on the other hand, hold a large basket of companies focused on all aspects of the oil market, giving investors diversified exposure to the sector.

Some examples of oil price-focused ETFs include the United States Oil Fund LP (USO) and the United States Brent Oil Fund LP (BNO). USO is the largest and most liquid oil ETF, with over $1.67 billion in assets under management. It is designed to mirror the percentage change in the spot price of WTI. BNO, on the other hand, mirrors the daily percentage change in the spot price of Brent crude oil and has $184 million in assets under management.

Examples of broad oil stock ETFs include the Energy Select SPDR Fund (XLE) and the Vanguard Energy ETF (VDE). XLE is the largest ETF focused on energy stocks, with over $36 billion in assets under management. It holds shares of energy companies that are part of the S&P 500 index, including ExxonMobil, Chevron, and ConocoPhillips. VDE is a broad-based fund that provides investors with exposure to companies involved in producing energy products such as oil, natural gas, and coal. It held 113 energy stocks as of mid-2024.

In addition to these two main types, there are also subsector-specific oil ETFs that focus on a particular segment of the oil market, such as midstream operations or oil-field services. One example of a subsector-specific oil ETF is the Alerian MLP ETF (AMLP), which focuses on midstream companies.

ETNs

Exchange-traded notes (ETNs) are a way to gain exposure to crude oil without trading commodity futures. ETNs are contracts between investors and the issuer, and the issuer will likely use crude oil futures contracts to offset their exposure. However, the ETN itself holds no assets.

Some examples of ETNs that provide exposure to crude oil include:

• IPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL)
• Credit Suisse X-Links Crude Oil Shares Covered Call ETN (USOI)
• VelocityShares 3x Long Crude Oil ETN (UWTI)
• VelocityShares 3x Inverse Crude Oil ETN (DWTI)

One advantage of investing in commodity ETNs is that capital gains taxes are deferred until the position is sold, while gains on commodity ETFs are taxed annually even if they remain in the portfolio. However, it is important to note that ETNs pose counterparty risk due to their structure as unsecured debt obligations.

Frequently asked questions