Invest In Oil: Strategies For Risk-Averse Individuals

Oil is a strategic commodity and a basic necessity of modern life. It is one of the most important driving forces of the economy, powering factories, transportation and, most likely, your car. Oil companies remain among the most valuable businesses in the world, even when oil prices falter due to concerns about political events or pandemics.

There are several ways to invest in oil, including oil-related stocks, oil mutual funds, and oil futures. Here are some options to consider if you want to invest in oil without taking on too much risk:

- Oil Exchange-Traded Funds (ETFs): ETFs provide access to a variety of assets without putting all your money into individual stocks. Oil ETFs track the performance of several oil stocks, allowing investors to minimise risk while taking advantage of the performance and popularity of the oil sector. Examples include the US Oil Fund (USO), Invesco DB Oil Fund (DBO), and ProShares Ultra Bloomberg Crude Oil (UCO).

- Energy Stocks, Equity ETFs, and Mutual Funds: Investors can gain exposure to oil by purchasing related equities directly or through energy-sector ETFs and mutual funds. While energy stocks come with risks, ETFs and mutual funds offer diversification within the sector. Examples include the Energy Select Sector SPDR Fund (XLE) and iShares Global Energy ETF (IXC).

- Oil Company Stocks: A simple way to invest in oil is by buying stocks of major oil companies such as ExxonMobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY). These companies' values fluctuate with the cost of oil, though there is no guarantee of returns.

- Master Limited Partnerships (MLPs): MLPs are publicly traded entities that combine the tax benefits of a partnership with the liquidity of a public company. They are known for paying high dividends, making them attractive for investors seeking long-term income streams. Examples include Energy Transfer (ET), Brookfield Property Partners (BBU), and MPLX (MPLX).

- Oil Futures: Futures are advanced and complex investment options that allow you to purchase oil at a specified price in the future. While they can be risky, they provide a direct way to invest in oil without literally buying barrels of oil.

Invest in oil ETFs

Oil ETFs, or exchange-traded funds, are a good option for those who are new to investing or looking to diversify their portfolio. They are baskets of securities that either track the price of oil as a commodity or contain oil stocks. Oil ETFs allow investors to minimise risk while taking advantage of the performance and general popularity of the oil sector.

• United States Oil Fund (USO): This ETF directly tracks the price of oil through futures contracts on the benchmark West Texas Intermediate (WTI) crude oil. It is meant to mirror the percentage change in the spot price of WTI, a light sweet crude oil delivered to Cushing, Oklahoma, that acts as a benchmark price for US oil.
• ProShares Ultra Bloomberg Crude Oil (UCO): A leveraged ETF that aims to double the daily price movements of WTI crude oil.
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP): An ETF that tracks an index of the stocks of oil producers and explorers.
• VanEck Vectors Oil Services ETF (OIH): An ETF that tracks an index of the stocks of companies that provide support services to oil producers and explorers.
• IShares U.S. Oil & Gas Exploration & Production ETF (IEO): This ETF seeks to track the investment results of an index composed of US equities in the oil and gas exploration and production sector.
• United States Brent Oil Fund LP (BNO): This ETF has the best 1-year return among oil ETFs. It is structured so that the daily percentage change in the spot price of Brent Crude oil is mirrored by the percentage change in the fund's net asset value.

Invest in oil company stocks

A simple way to invest in oil is by buying stocks of oil companies. Examples of major oil companies include ExxonMobil (XOM), Chevron (CHV), and Occidental Petroleum (OXY). The values of these companies fluctuate with the cost of oil, although there is no guarantee as they depend on other factors too.

In addition to the major oil companies, there are also companies that specialize in specific aspects of the industry. Here are some examples:

• Pipeline-oriented: Enterprise Products (EPD)
• Transport- and storage-focused: Kinder Morgan (KMI)
• Drilling support servicers: Schlumberger (SLB) and Halliburton (HAL)
• Refiners: Valero (VLO) and Marathon Petroleum (MPC)
• Explorers: Cabot Oil & Gas (COG)
• Tanker fleet owners: Teekay Tankers (TNK)

Understanding the energy cycle, the industry's landscape, and the impact of price fluctuations can help you determine valuable oil-related assets.

You can access the market through an online broker or financial advisor and cash out when you want. However, large oil companies are involved in refining, which doesn't always benefit from higher oil prices, so stock prices don't always align with the price of oil. Individual stocks can also be more volatile than diversified ETFs.

Invest in oil futures

Oil futures are a more advanced and complex investment option. They are a direct way to purchase oil without buying barrels of oil. They are also the most popular way to trade commodities.

With oil futures, you agree to buy oil at a specified price at a future date. You need to put down only a portion of the contract's value now. This structure allows traders to buy more than they would otherwise be able to. If the investment pays off, they can make a lot of money. However, they can lose it just as quickly if the price of oil moves in the wrong direction.

Oil futures are extremely volatile and riskier than other investment options. You must be correct on the timing and price movement to see a profit.

To invest in oil futures, you will need to work with a broker that offers futures trading. This typically requires a higher account minimum than a traditional stock brokerage account.

• United States Oil Fund (USO)
• Invesco DB Oil Fund (DBO)
• ProShares K-1 Free Crude Oil Strategy ETF (OILK)
• ProShares Ultra Bloomberg Crude Oil (UCO)
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
• VanEck Vectors Oil Services ETF (OIH)

Buy energy ETFs and mutual funds

Energy ETFs and mutual funds are a great way to invest in oil without taking on too much risk. These funds allow investors to gain exposure to the energy sector while reducing their risk through diversification.

Energy ETFs

Energy ETFs, or exchange-traded funds, are a popular option for those looking to invest in oil. ETFs offer instant diversification, giving investors access to a variety of assets and reducing the risk associated with individual stocks.

• Instant diversification: ETFs track the performance of multiple oil stocks, providing exposure to a range of companies in the industry.
• Lower risk: By investing in a fund rather than individual stocks, you reduce the risk of losing your investment due to the failure of a single company.
• Access to the energy sector: ETFs provide an easy way to invest in oil and energy companies, without the need to pick and choose individual stocks.
• Sustainable investing options: There are clean energy ETFs that focus on renewable energy companies, such as wind farms or solar panel producers.
• Lower fees: ETFs tend to be cheaper than other types of funds, such as mutual funds.
• Energy Select Sector SPDR Fund (XLE): This ETF tracks the performance of 22 energy stocks within the S&P 500 Index, including Exxon Mobil and Chevron.
• Invesco S&P 500 Equal Weight Energy ETF (RSPG): This ETF holds the same stocks as XLE but weights them equally, providing a more balanced approach.
• SPDR S&P Oil & Gas Exploration & Production ETF (XOP): This ETF focuses on exploration and production stocks, offering access to a sub-segment of the energy sector.
• IShares Global Energy ETF (IXC): This ETF provides exposure to both domestic and international energy stocks, with a focus on global energy producers and refiners.
• United States Oil Fund LP (USO): This ETF tracks the price of West Texas Intermediate crude oil and is a direct way to invest in oil futures.

Energy Mutual Funds

Energy mutual funds are another option for investors looking to gain exposure to the energy sector. Mutual funds are similar to ETFs in that they offer diversification and are managed by investment professionals. However, mutual funds tend to have higher fees and can only be bought and sold at the end of the trading day.

• Vanguard Energy Fund (VGENX): This fund has an expense ratio of 0.44% and offers heavy exposure to oil producers, as well as companies in the coal and solar industries.
• Fidelity Select Energy Portfolio (FSENX): With an expense ratio of 0.73%, this fund provides access to oil producers and other energy-related companies.

In conclusion, energy ETFs and mutual funds offer a lower-risk way to invest in oil by providing diversification and exposure to the energy sector. When considering these investment options, be sure to research the funds' holdings, fees, and performance to align with your personal investment goals and risk tolerance.

Buy oil stocks with a brokerage account

You can buy the stock of an oil or gas company using a brokerage account. Big oil companies trade on major stock exchanges, so you can buy and sell shares with no transaction fees. To do this, you need an account with one of the popular brokerages, such as Ally Invest.

This is one of the more straightforward ways to invest in oil. But there are several other options at your disposal.

Steps to buying oil stocks

Pick a trading platform

Choose a broker by considering its trading costs, fees and features.

Open and fund an account

Be ready to supply your ID, bank account information and Social Security number.

Find oil stocks

Use a stock screener to pinpoint stocks by company name or ticker symbol.

Submit your order

Once you’ve found a stock you like, indicate how many shares you’d like to purchase and submit your order.

Oil stocks to consider

• TotalEnergies SE (TTE)
• Chevron (CHV)
• ExxonMobil (XOM)
• ConocoPhillips (COP)
• Occidental Petroleum (OXY)
• Enterprise Products (EPD)
• Kinder Morgan (KMI)
• Schlumberger (SLB)
• Halliburton (HAL)
• Valero (VLO)
• Marathon Petroleum (MPC)
• Cabot Oil & Gas (COG)
• Teekay Tankers(TNK)

Risks of buying oil stocks

• Large oil companies are involved in refining, which doesn’t benefit from higher oil prices, so stocks might not align with the price of oil.
• Individual stocks can be more volatile than diversified ETFs.
• Ethical issues: Oil companies are one of the leading causes of CO2 emissions, so investors interested in ESG investing might want to avoid investing in oil companies.

Frequently asked questions