The Real Cost Of Oil: Investing In A Barrel Of Compromises

Investing in oil can be done in several ways, including buying oil-related stocks, oil mutual funds, oil futures, or even physical oil. Oil is a crucial resource for the global economy, providing the energy for transportation and manufacturing. The price of oil is volatile and affected by supply and demand, as well as the actions of OPEC and other oil-producing nations. Investors can choose from a range of options, including oil drilling and service company stocks, energy-sector ETFs and mutual funds, and commodity-linked ETFs. While investing in oil can be risky, it offers a way to gain exposure to the energy sector and potentially profit from price fluctuations.

Oil stocks

Upstream companies, also known as exploration and production (E&P) companies, are involved in identifying and extracting oil from the ground or seafloor. Examples include ConocoPhillips and BP. Midstream companies, such as Kinder Morgan and Enbridge, are responsible for transporting, processing, and storing crude oil and natural gas. Downstream companies, like Marathon Petroleum and Phillips 66, refine crude oil and natural gas into products like gasoline, jet fuel, and natural gas for vehicles and heating systems. Integrated companies, such as ExxonMobil and Chevron, operate in multiple segments of the supply chain, including exploration, production, midstream, and downstream activities.

When investing in oil stocks, it is important to research the company thoroughly and consider the overall volatility of the oil market. Oil prices are influenced by supply and demand, geopolitical events, and the actions of organisations like OPEC. Additionally, oil stocks can be more volatile than other investments, especially for upstream companies that are susceptible to fluctuations in oil prices. To mitigate risk, investors can consider investing in mutual funds or exchange-traded funds (ETFs) that provide exposure to a diversified mix of oil company stocks.

Oil futures

When you trade 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. If the price falls, the contract could lose value, and the owner could lose money when selling.

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.

Oil ETFs

Oil Price-Focused ETFs

Oil price ETFs aim to provide investors with direct exposure to the rise and fall of oil prices. They strive to track the daily movement of a common oil price benchmark, such as West Texas Intermediate (WTI) or Brent Crude. Oil price-focused ETFs allow investors to potentially profit from a more direct bet on oil prices. Examples include the United States Oil Fund LP (USO) and the United States Brent Oil Fund LP (BNO).

Broad Oil Stock-Focused ETFs

Oil stock ETFs hold a large basket of companies focused on all aspects of the oil market. They give investors diversified exposure to the sector, reducing the risk of investing in an underperforming oil stock. They also provide investors with additional upside potential because oil stocks can outperform crude oil prices. An example of a broad oil stock ETF is the Vanguard Energy ETF (VDE).

Subsector-Specific ETFs

Subsector-specific oil stock ETFs take a more focused approach by holding a basket of stocks concentrated on one aspect of the oil market, such as midstream companies or oil-field services. They let investors take a more targeted approach by investing in an oil market segment they believe will perform well. An example of a subsector-specific oil ETF is the Alerian MLP ETF (AMLP), which focuses on midstream companies.

Oil prices

The price of oil has seen significant fluctuations in recent years, such as in 2020 when the COVID-19 pandemic caused a decrease in demand and oil prices collapsed. More recently, in 2022, the Russian invasion of Ukraine disrupted oil markets, causing oil prices to rise above $125 per barrel.

The volatility of oil prices and the complex nature of the oil market can make investing in oil a confusing and risky endeavour. However, there are several ways for investors to gain exposure to oil, including through oil stocks, oil mutual funds, oil futures, and exchange-traded funds (ETFs) or notes (ETNs).

Oil stocks involve investing in companies involved in the extraction and production of petroleum. Oil mutual funds, ETFs, and ETNs offer a more diversified approach by investing in a range of oil-related stocks or futures contracts. While investing in oil can be affordable and accessible to beginners, it is important to carefully research and understand the risks associated with each investment option.

Oil companies

There are several ways to invest in oil companies, and most don't include owning any physical oil yourself. Here are some common ways to invest in oil companies:

• Oil stocks: These are shares of companies involved in the extraction and production of petroleum. Examples include ConocoPhillips, Devon Energy, and Diamondback Energy. When investing in oil stocks, it is important to research the company thoroughly and consider its financial metrics, such as dividend yield, free cash flow, and market capitalization.
• Oil mutual funds and exchange-traded funds (ETFs): Oil funds, such as ETFs and index funds, can quickly and easily diversify your portfolio. Examples include the iShares Global Energy Sector Index Fund (IXC) and the Energy Select Sector SPDR Fund (XLE).
• Oil futures and options: Oil futures and options are more advanced investment options, allowing investors to speculate on the price of oil. Oil futures are contracts where two parties agree to exchange a set amount of oil at a set price on a set date. Examples include West Texas Intermediate (WTI) crude oil futures and Brent crude oil futures.
• Energy equities and sector mutual funds: Investors can gain exposure to oil by purchasing related equities directly or through energy-sector ETFs and mutual funds. Examples include the Vanguard Energy Fund Investor Shares (VGENX) and the Fidelity Select Energy (FSENX).

It is important to note that investing in oil companies carries risks due to the volatile nature of the industry. Oil prices can fluctuate significantly based on supply and demand, geopolitical events, and decisions made by oil-exporting countries or companies. When investing in oil companies, it is crucial to consider factors such as financial stability, cost control, and operational diversification.

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