Oil Investment Options: A Guide To Getting Started

There are several ways to invest in oil, and most don't involve owning any physical oil yourself. You can gain exposure to oil by investing in oil-related stocks, oil mutual funds, oil futures, or oil ETFs and ETNs.

Oil stocks are shares of companies involved in the extraction and production of petroleum. Examples of oil stocks include ConocoPhillips, Devon Energy, Enbridge, ExxonMobil, and Phillips 66.

Oil mutual funds, also known as energy-sector mutual funds, are baskets of stocks that you buy all at once, offering quick diversification for your portfolio. Examples of oil mutual funds include the Vanguard Energy Fund Investor Shares and Fidelity Select Energy.

Oil futures are contracts where two parties agree to exchange a set amount of oil at a set price on a set date. Oil futures can be traded through an online brokerage account or with the aid of a full-service broker.

Oil ETFs and ETNs are exchange-traded funds and notes that invest in oil futures contracts rather than energy stocks. Examples of oil ETFs include the United States Oil Fund and the Invesco DB Oil Fund, while examples of oil ETNs include the iPath Series B S&P GSCI Crude Oil Total Return Index ETN and the Credit Suisse X-Links Crude Oil Shares Covered Call ETN.

Oil stocks

There are different types of oil stocks, which operate in different parts of the industry:

• Upstream oil and gas companies, also known as exploration and production (E&P) companies, explore locations for oil, and drill wells to extract it. They are the most susceptible to fluctuations in the price of oil.
• Midstream companies transport, process, and store crude oil, natural gas, natural gas liquids (NGLs), and refined petroleum products. Their profitability is less affected by oil price fluctuations as they often operate using fixed-rate, long-term, or take-or-pay contracts.
• Downstream companies refine crude oil into other products like fuel or petrochemicals, or sell refined products to consumers. Some do both. The price of oil affects refineries' profitability because they make their money on the "crack spread", or the difference between the price of oil and the price of refined products.
• Integrated companies operate in more than one of the above segments of the supply chain.

Some examples of oil stocks include:

• ConocoPhillips (COP)
• Enterprise Products Partners (EPD)
• Phillips 66 (PSX)
• ExxonMobil (XOM)
• Chevron (CVX)
• Occidental Petroleum (OXY)
• Cheniere Energy (LNG)
• Schlumberger (SLB)
• Halliburton (HAL)
• TotalEnergies (TTE)
• BP (BP)

Oil mutual funds

There are several oil mutual funds in the market, each with its own unique characteristics. Here are the key details about some of the top-performing oil mutual funds:

• Vanguard Energy Fund Investor Shares (VGENX): This fund was established in 1984 and has a long-term capital appreciation goal. It invests at least 80% of its assets in the common stock of companies engaged in the energy industry, with a focus on Integrated Oil & Gas, and Oil & Gas Exploration & Production. As of June 30, 2021, it managed $4.8 billion in investor assets. The fund has a relatively low expense ratio of 0.37% and does not charge sales loads, but it requires a minimum initial investment of $3,000.
• Fidelity Select Energy Portfolio (FSENX): Managed by Fidelity Investments, this fund has been around since 1981. It also invests a minimum of 80% of its assets in securities of energy-focused companies, including those in oil, gas, electricity, coal, and new energy sources. It generated a 10-year annualized return of -2.08% as of June 30, 2021, and has an expense ratio of 0.85%. Shares are available without load or deferred sales charges, and there is no minimum investment requirement.
• BlackRock Natural Resources Trust Fund (MDGRX): This fund, established in 1994, seeks long-term capital growth by investing primarily in securities of companies with substantial natural resource assets, including energy, chemicals, oil, gas, and mining. As of June 30, 2021, it has generated a 10-year annualized return of 0.82% with an expense ratio of 1.26%. A notable drawback is the upfront sales load of 5.25% on new share purchases, but there is no deferred sales charge. A minimum investment of $1,000 is required.
• Integrity Mid-North American Resources Fund (ICPAX): This fund, offered by the Integrity family of mutual funds, started in 1999. It focuses on investing in companies participating in or benefiting from the development of resources in the Williston Basin area. The fund has generated a 10-year annualized return of -2.23% as of July 2021, with an expense ratio of 1.50%. A 5% upfront sales charge is applied to all new investments, and a minimum investment of $1,000 is required.

It is important to remember that investing in the oil industry carries significant risks due to its volatile nature. Oil prices are influenced by various factors, including global supply and demand, renewable energy adoption, and geopolitical events. Before investing, be sure to do your own research and understand the potential risks and returns associated with these oil mutual funds.

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. But in spring 2020, when the coronavirus pandemic was starting, the oil futures market collapsed. Oil refineries weren't buying as much oil, and there ended up being 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.

To trade futures through an online brokerage account, you will need to obtain margin and pass a broker's suitability review. 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 ETFs

How Oil ETFs Work

Types of Oil ETFs

There are two main types of Oil ETFs:

• Commodity Oil ETFs: These ETFs track the price of oil through benchmarks such as the West Texas Intermediate (WTI) or Brent Crude benchmarks. They aim to replicate the performance of the underlying commodity index by investing in oil futures contracts. Examples include the United States Oil Fund LP (USO) and the United States Brent Oil Fund LP (BNO).
• Oil Equity ETFs: These ETFs invest in the stocks of companies involved in the oil industry, such as exploration and production companies, midstream companies, downstream companies, and integrated oil majors. Examples include the SPDR Oil and Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR Fund (XLE).

Factors to Consider

When investing in Oil ETFs, it is important to consider the following:

• Performance: Evaluate the historical performance of the ETF over different time periods to understand how it has fared in different market conditions.
• Fees and Expenses: Compare the expense ratios and management fees associated with different Oil ETFs to assess their impact on your investment returns over time.
• Liquidity: Consider the trading volume and assets under management of the ETF. Higher liquidity can indicate a more active market and potentially lower transaction costs.
• Diversification: Diversification can help manage risk. Consider investing in ETFs that provide exposure to a range of oil-related companies or contracts rather than focusing on a single aspect of the oil industry.
• Risk Tolerance: Oil prices can be volatile, and Oil ETFs carry varying levels of risk. Assess your risk tolerance and ensure the ETF aligns with your investment goals and risk profile.

Advantages of Oil ETFs

• Accessibility: Oil ETFs provide a straightforward way to gain exposure to the oil industry without the complexities of trading oil futures or directly purchasing oil.
• Diversification: Oil ETFs can help diversify an investment portfolio, particularly if it already includes broad funds.
• Liquidity: Oil ETFs are typically more liquid than other oil-related investments, making it easier to enter and exit positions.

Risks of Oil ETFs

It is important to be aware of the risks associated with Oil ETFs:

• Volatility: Oil prices can be highly volatile, and Oil ETFs may experience significant price swings. Geopolitical events, supply and demand disruptions, and economic factors can all influence oil prices.
• Tracking Error: Commodity Oil ETFs may not always deliver the exact return of the underlying oil index or crude oil prices due to factors such as contango or negative roll yield.
• Industry Risk: The oil industry is subject to various risks, including global supply and demand fluctuations, regulatory changes, and the transition to renewable energy sources. These factors can impact the performance of Oil ETFs.

In summary, Oil ETFs offer investors a convenient and diversified way to invest in the oil industry. However, it is crucial to carefully consider the risks, fees, and performance of different Oil ETFs before making any investment decisions.

Oil companies

Upstream (or Exploration and Production) Companies

These companies explore locations for oil and drill wells to extract it from the ground or seafloor. They are the most susceptible to fluctuations in the price of oil. Examples include ConocoPhillips and Enterprise Products Partners.

Midstream Companies

Midstream companies transport, process, and store crude oil, natural gas, natural gas liquids, and refined petroleum products. Their profitability is less affected by oil price fluctuations due to their use of fixed-rate, long-term, or take-or-pay contracts. Examples include Berkshire Hathaway and Phillips 66.

Downstream Companies

Downstream companies refine crude oil into other products like fuel or petrochemicals, or sell refined products to consumers. Some do both. Their profitability is affected by the "crack spread", the difference between the price of oil and the price of refined products. Examples include ExxonMobil and Chevron.

Integrated Companies

Integrated companies, also known as "Big Oil", operate in more than one segment of the supply chain. They have large upstream and downstream operations, with some midstream capability as well.

Oilfield Services Companies

Oilfield services companies provide equipment, operational support, and services to upstream companies. Examples include Schlumberger NV, Halliburton Company, and Baker Hughes Company.

Exchange-Traded Funds (ETFs)

Oil ETFs allow you to invest in an entire subsector of the oil industry at once, rather than in a single oil company. One example is the SPDR Oil and Gas Exploration & Production ETF, which tracks the upstream subsector as a whole.

Frequently asked questions