Oil Fund Investment: A Guide To Getting Started

Investing in oil funds can be a complex and risky endeavour, but it is possible to do so without needing a lot of money. Oil funds are a type of investment that provides exposure to the oil market, either directly through oil prices or indirectly through oil companies. One of the most common ways to invest in oil funds is through exchange-traded funds (ETFs), which are baskets of securities that track the price of oil or contain oil stocks. Oil ETFs offer an accessible way to gain direct exposure to oil prices, mitigating the risks associated with individual company performance in the volatile oil sector. They also provide diversification benefits, reducing the risk of investing in underperforming oil stocks. However, it is important to note that oil prices can be highly volatile and influenced by global and geopolitical events. Before investing, it is crucial to understand the complexities of the oil market and conduct thorough research.

Oil ETFs

There are two main types of oil ETFs: oil price-focused ETFs and broad oil stock-focused ETFs. Oil price-focused 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. Broad 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 ETFs include:

• United States Brent Oil Fund LP (BNO)
• United States Oil Fund LP (USO)
• Energy Select SPDR Fund (XLE)
• Vanguard Energy ETF (VDE)
• Alerian MLP ETF (AMLP)
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

It is important to note that investing in oil ETFs carries risks. Oil prices can be extremely volatile, swinging drastically in either direction, and are often closely correlated with global and geopolitical events. Additionally, ETFs may not be suitable for long-term investment due to the costs associated with rolling futures contracts, which can impact their performance over longer periods.

Oil stocks

Oil Exchange-Traded Funds (ETFs)

Oil ETFs are baskets of securities that track oil prices or contain oil stocks. They are a popular way to invest in the oil market as they provide easy access to a challenging-to-own commodity. ETFs can be commodity ETFs, tracking oil prices through benchmarks, or stock ETFs, holding a large basket of oil company stocks. Here are some of the top oil ETFs:

• Energy Select SPDR Fund (XLE): The largest ETF focused on energy stocks, with holdings in companies like ExxonMobil and Chevron.
• Vanguard Energy ETF (VDE): A broad oil stock ETF with a diverse range of energy stocks beyond those listed in the S&P 500.
• Alerian MLP ETF (AMLP): A subsector-specific ETF focused on midstream companies, offering steadier cash flow and high-yielding dividends.
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP): This ETF provides exposure to integrated oil and gas companies, exploration and production firms, and refining and marketing companies.
• United States Oil Fund LP (USO): This ETF provides direct exposure to oil prices by investing in futures contracts based on West Texas Intermediate (WTI) prices.
• Exxon Mobil Corporation (XOM): One of the world's largest integrated energy companies, with a strong presence in the S&P 500 ETFs.
• Chevron (CVX): Another major integrated energy company with a significant presence in oil ETFs.
• ConocoPhillips (COP): A well-known oil company with a strong analyst rating.
• EOG Resources (EOG): A large oil-field services company held by the Energy Select SPDR Fund.
• Occidental Petroleum (OXY): A diversified oil company with a "Strong Buy" analyst rating.
• Schlumberger (SLB): A well-known oilfield services company with a "Strong Buy" analyst rating.

Oil mutual funds

One of the advantages of investing in oil mutual funds is the potential for high profit margins over the long term. Oil is still a vital energy product worldwide, and while alternatives are gaining traction, the demand for oil remains high.

However, investing in the oil industry also carries significant risks. Oil prices are notoriously volatile, influenced by various factors such as supply and demand imbalances, geopolitical events, and decisions made by the OPEC cartel. Additionally, oil production is capital-intensive, and companies in this sector often face challenges related to debt, acquisitions, and spending.

• Vanguard Energy Fund Investor Shares (VGENX): Established in 1984, this fund seeks long-term capital appreciation by investing at least 80% of its assets in companies engaged in energy-related activities. As of June 30, 2021, it managed $4.8 billion in investor assets.
• Fidelity Select Energy Portfolio (FSENX): Managed by Fidelity Investments, this fund also invests a minimum of 80% of its assets in securities of energy companies, including those involved in oil, gas, electricity, coal, and new energy sources. It has no minimum investment requirement.
• BlackRock Natural Resources Trust Fund (MDGRX): This fund, established in 1994, seeks to provide long-term capital growth by investing in companies with substantial natural resource assets, including energy, oil, gas, and chemicals. It requires a minimum investment of $1,000.
• Integrity Mid-North American Resources Fund (ICPAX): Offered through the Integrity family of mutual funds, this fund invests primarily in companies involved in the development of resources in the Williston Basin area. It also considers companies that benefit from the region's resource development. A minimum investment of $1,000 is required.

It is important to note that investing in oil mutual funds carries risks, and investors should carefully consider their investment objectives and conduct thorough research before making any investment decisions.

Oil futures

The idea with futures trading is that you never actually end up with the oil yourself. There is usually a healthy market of buyers who will take a futures contract off your hands. However, in the spring of 2020, when the coronavirus pandemic was starting, the oil futures market collapsed. Oil refineries weren't buying as much oil, and there was a backlog. Investors trading oil futures couldn't find anyone to buy their contracts and dropped their prices to entice buyers. In April 2020, oil prices temporarily fell into the negative: The futures contract for West Texas crude oil was minus $37.63 a barrel. In other words, investors were willing to pay to get rid of their contracts. Oil futures have since rebounded, breaking above $50 in December 2020, but that scenario may give investors some pause. If you're interested in trading futures, proceed with caution.

To trade futures through an online brokerage account, you will need to obtain margin and pass a broker's suitability review, which isn't a particularly tough task these days. The process typically requires completing an online application and waiting a few days. Some brokerages require a minimum account value to authorise futures trading, while others do not. Fees and commissions will also vary.

Alternatively, you could trade futures with the aid of a full-service broker, typically a commodity trading advisor (CTA).

Oil companies

Before buying an oil company's stock, it is important to research the company thoroughly. It is generally advisable to have the majority of a portfolio invested in mutual or index funds, rather than individual stocks, due to the diversification that funds provide.

Some of the largest oil companies by market cap, and therefore popular investments, include:

• ExxonMobil
• Chevron
• ConocoPhillips
• EOG Resources
• Marathon Petroleum

Investing in individual oil companies can be riskier than investing in an oil ETF or fund, as the performance of the company is dependent on a number of factors, such as resource quality, debt, acquisitions, spending, and capital-allocation strategies.

Frequently asked questions