Oil Commodity Investment In India: A Beginner's Guide

Oil is a valuable commodity that powers most vehicles, factories, and electricity generation. Investing in oil can be done through several methods, and it doesn't require you to physically buy and store oil barrels. Here are some common ways to invest in oil:

- Oil Stocks: You can invest in companies involved in the extraction and production of petroleum by purchasing their stocks. However, it's generally recommended to have a diversified portfolio with mutual or index funds rather than individual stocks.

- Oil Mutual Funds and Exchange-Traded Funds (ETFs): These funds are baskets of stocks that provide quick diversification. While investing in a specific oil fund may not offer the same level of diversification as a broad index fund, it can still help balance your portfolio.

- Oil Futures: Oil futures are more advanced and involve locking in the price of oil in advance. It's a volatile option and not suitable for everyone. Oil futures are contracts where parties agree to exchange a set amount of oil at a set price on a future date.

- Commodity-based ETFs or Mutual Funds: You can invest in oil by purchasing ETFs or mutual funds that focus on the oil sector. This option provides more diversification and is generally considered safer than investing in individual oil stocks.

Oil stocks and mutual funds

There are several ways to gain exposure to the oil industry in India through stocks and mutual funds.

One option is to invest in oil stocks directly. This involves purchasing shares of companies that operate within the oil and gas industry, including those involved in drilling, extraction, oilfield services, oil refining, and transportation.

Another option is to invest in oil mutual funds, which are tasked with investing exclusively in the energy sector by holding a majority of their portfolios in companies related to energy. Some examples of oil mutual funds available in India include:

• 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 assets in the common stock of companies primarily engaged in the energy industry. As of June 30, 2021, it managed $4.8 billion in investor assets.
• Fidelity Select Energy Portfolio (FSENX): This fund, supported by Fidelity Investments, was first made available to investors in 1981. It invests a minimum of 80% of its assets in securities of companies engaged in energy field activities, including oil, gas, electricity, coal, and new sources of energy. As of June 30, 2021, FSENX managed $1.3 billion in assets.
• 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, including energy, chemicals, oil, gas, and mining. As of June 30, 2021, it managed $165.1 million in assets.
• 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 in the stock of domestic and foreign issuers participating or benefiting from the development of resources in the Williston Basin area. As of July 2021, the fund held $119.6 million in assets.

In addition to these funds, there are also several energy-focused exchange-traded funds (ETFs) that may be a more accessible option for individual investors in India. ETFs offer a diversified way to invest in the oil and energy sector, providing exposure to a basket of companies within the industry.

When investing in oil stocks and mutual funds, it is important to consider the risks involved. The oil industry is subject to fluctuations in supply and demand, geopolitical issues, and changes in global economic growth, all of which can impact the price of oil and the performance of oil-related investments.

Oil ETFs

Exchange-traded funds (ETFs) are a more common and practical way for the average investor to gain exposure to the oil industry without having to physically store oil. Oil ETFs invest in crude oil futures in an attempt to track the performance of the underlying commodity index.

Some examples of oil ETFs include:

• WisdomTree WTI Crude Oil ETF (CRUD)
• United States Oil Fund (USO)
• United States 12 Month Oil Fund (USL)
• Invesco DB Oil Fund (DBO)
• IPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL)
• Credit Suisse X-Links Crude Oil Shares Covered Call ETN (USOI)

Commodity ETFs are subject to tracking errors, meaning they may not deliver the return of the underlying index or crude oil prices. They are also frequently affected by negative roll yields as futures contracts expire, making them suitable for short-term speculation only.

Commodity ETFs can be purchased through an online brokerage account or a full-service broker.

Oil futures

There are two primary futures markets for crude oil: West Texas Intermediate (WTI) and Brent. WTI is the benchmark for the North American market, while Brent is the benchmark for the rest of the world. These two markets generally move together directionally, but prices vary depending on geographic factors.

The futures market is the most direct way to trade crude oil, but it may not be practical for most investors due to the large margin requirements and the need to take physical delivery of the barrels. However, there are other ways to gain exposure to the oil market, such as buying stocks of oil-related companies or investing in exchange-traded funds (ETFs) that track the oil industry.

In India, crude oil futures trading is done on the Multi Commodity Exchange (MCX). These futures are popular among investors because the margins and lot sizes are small, and the market is very liquid. The lot sizes for crude oil futures on the MCX are 100 barrels for the Crude Oil lot and 10 barrels for the Crude Oil Mini lot.

It is important to note that the oil market is very volatile, and prices can be affected by a variety of factors, including supply and demand, geopolitical events, and economic growth. As such, trading in oil futures can be risky, and it is important to carefully consider these risks before investing.

Oil companies

India's oil and gas industry is transitioning towards cleaner and more sustainable energy sources, such as natural gas and renewables. The government is promoting the use of natural gas and investing in renewable energy sources, indicating a shift towards a more sustainable energy mix.

• Oil and Natural Gas Corporation Ltd (ONGC)
• Reliance Industries Ltd
• Oil India Limited (OIL)
• Jindal Drilling and Industries Ltd
• United Drilling Tools Ltd
• Great Eastern Shipping Company Ltd
• Indian Oil Corporation Ltd (IOC)
• Asian Energy Services Ltd

Investing in oil and gas companies in India can be done through several avenues. You can open a trading account with a stockbroker and invest in publicly listed Indian oil and gas companies. You can also explore mutual funds and exchange-traded funds (ETFs) that focus on the energy sector.

When investing in oil and gas companies, it is important to consider the risks and rewards associated with the different segments of the industry, such as upstream, midstream, and downstream activities. It is also crucial to track oil and gas prices and understand the factors influencing them, such as global supply and demand, geopolitical events, and economic conditions.

Additionally, when selecting oil and gas companies to invest in, consider the following:

• Risk tolerance: Determine your risk tolerance and choose companies accordingly. Larger, more integrated companies may offer more stability, while smaller exploration companies can be riskier but offer higher potential returns.
• Investment horizon: Consider your long-term goals and choose companies with solid growth potential or sustainable dividends.
• Financial performance: Analyse company financials, including revenue, profitability, debt levels, and cash flow.
• Management team: Research the experience and track record of the company's management team.
• Competitive landscape: Analyse the company's position within the industry and its competitive advantages.
• Growth potential: Assess the company's future growth prospects, including new projects and acquisitions.

Energy sector ETFs

Energy ETFs (exchange-traded funds) are investment vehicles or money pools traded on stock exchanges, much like stocks. Energy ETFs invest in oil, gas, and alternative energy firms to track a broad sector index, sub-sector, commodity, or another asset. They allow investors to gain exposure to the energy industry without having to pick specific firms.

• Nippon India Power & Infra Fund
• SBI Energy Opportunities Fund
• Tata Resources and Energy Fund
• Direxion Daily Oil Services Bull 2X Shares ONG
• Energy Select Sector SPDR Fund XLE
• NRGU
• Diversification: Energy ETFs offer access to various firms, helping investors avoid market risk, commodity price risk, and geopolitical risk.
• Specialization: Investors can select ETFs based on investment objectives and specific requirements, such as investing in new kinds of energy through clean energy ETFs.
• Access to the energy sector's performance: By investing in energy ETFs, investors gain exposure to the energy sector's performance, which may differ from other sectors.
• Dividends: Many energy ETFs focus on companies that pay dividends, such as major oil companies.
• Hedge against inflation: Energy ETFs, particularly those with exposure to commodities like oil and natural gas, can serve as a hedge against inflation as energy prices often rise during inflationary periods.

Frequently asked questions