Investing in oil doesn't mean going to the gas pump, filling up a few gas cans and selling them to your friends or neighbors if the price goes up.
You can invest in oil, like stocks and other securities, through your brokerage account.
There are also a few more advanced ways to invest in this global commodity And, depending on your investing goals and risk tolerance, some options might be superior to others. Here's what you need to know if you're looking to get started with oil investing.
The Short Version
- The oil industry has been historically lucrative for investors.
- You can invest in oil by buying energy ETFs & mutual funds, investing in MLPS, buying stock in an oil and gas company, or trading oil options and futures.
- If you're concerned about the ethical implications of fossil fuels, consider investing in renewable energy.
Why Should You Even Consider Investing in Oil?
Oil is one of the most important driving forces of the economy. It enables shipping and transportation. It powers factories and, most likely, your car. Oil companies will continue to remain near the top of the list of the most valuable businesses in the world, even when oil prices falter over concerns about the impact of political events or pandemics.
If you want a slice of the profits from the lucrative oil and gas industry, you have a handful of choices for putting this precious resource in your portfolio.
How to Invest in Oil
It's effortless to buy the stock of an oil or gas company using a brokerage account. Because these and other big oil companies trade on the major stock exchanges, you can buy and sell shares with no transaction fees. To do that, you need an account with one of the popular brokerages such as Ally Invest or TD Ameritrade
This is one of the more straightforward ways to invest in oil. But there are several other options at your disposal.
1. Invest In Energy ETFs & Mutual Funds
Exchange-traded funds (ETFs) and mutual funds allow you to buy a basket of investments in one purchase. There are many funds to choose from in this arena. Some give you exposure to a set of stocks or oil and gas commodities. But others focus on particular regions or types of oil.
Some of the top energy index fund that you can invest in include the following:
- Energy Select Sector SPDR Fund (XLE)
- Vanguard Energy Index Fund (VDE)
- Fidelity MSCi Energy ETF (FENY)
- SPDR S&P Oil & Gas Equipment&Svcs ETF (XES)
Again, pretty much any online broker will let you trade various ETFs without paying commissions. And there are plenty of great brokers for mutual funds that have many no-transaction-fee (NTF) funds to choose from.
Just note that while stocks are going up and down with the company's performance and expected results, commodities are generally considered riskier than stocks. When you read that oil prices are going up or down, the oil commodities are what they are talking about.
2. Buy Stock in an Oil and Gas Company
If you want to invest in oil with little money, your brokerage account is probably the best place to look. With the new advent of no-fee stock trades at big brokerage houses, you can buy shares of stock without worrying about fees cutting into your investment.
If you think oil prices are on their way up, investing in oil and related companies can be a smart move. Some of the top oil companies you can buy shares from include:
Investing in oil companies directly gives you exposure to the energy market without having to buy oil directly.
However, as with all investments, ensure you understand the potential gains and risks before clicking the “buy” button.
3. Trade Oil Options and Futures
Expert and professional investors often look to options and futures to earn a profit in the commodities markets, among others. And since crude oil is obviously a massive commodity, you can also invest in oil by trading options and futures.
However, if you don't know much about options or futures, make sure to sit down and study before diving in. This type of investment is extremely risky if you don't know what you're doing. Even if you do, there's a good chance you'll lose money trading options and futures, so be fully aware of the risks when going in.
And pricing crashes can happen. Take 2020, for example, when U.S. oil prices briefly went negative. Many investors lost a lot of money in this period, particularly those trading futures on the losing side.
And just like investing in oil ETFs or mutual funds, starting with options or futures is straightforward. Most brokerage firms dropped the base fee for options trades in 2019, but you'll still pay around 50 to 75 cents per contract. Some investment apps like Robinhood offer commission-free options, and Interactive Brokers is also an excellent broker. As for futures contracts, they typically cost around $1 to $2 each.
This can give you direct investment exposure to oil. When prices go up and down, so will your investment. Depending on your brokerage, you may need additional approval for options trading.
Again this isn't for people wanting to know how to invest in oil with little money. It's best for people who have significant assets. You should invest only what you can afford to lose if things don't work out as expected.
4. Invest in MLPs
This is one of the more direct options for those who want to know how to invest in oil wells. “MLP” is short for Master Limited Partnership. An MLP is a type of business entity that's publicly traded, like a stock. But there are some key differences to understand.
MLPs give you the tax benefits of a private partnership. This means you pay taxes only on distributions. But you can buy and sell with the liquidity of a public company. Investors are considered “partners,” although most investors don't have an active role in the venture.
MLPs are best for investors looking to earn cash flow from their investments. They're not as volatile as commodities in many cases. But they have some unique tax reporting rules, and don't usually appreciate all that much. This makes them more of a niche investment than regular oil stocks.
My Personal Experience with Oil Investing
In January 2016, oil and gas prices and stocks looked to be at a low point. After a quick chat, my wife and I decided it was a good time to buy into oil and gas. We chose to do so through a semi-diversified purchase of three stocks.
We purchased shares of Chevron (CVX), Conoco Phillips (COP), and ExxonMobil ( XOM) and still hold them in our joint portfolio. Since we first invested in these companies, we've received a trickle of cash flow from the stocks' dividends. If you add up the performance of all three stocks, we have a nice little gain in our portfolio.
But over the last few years, we've seen massive shifts in the price of oil. The coronavirus outbreak brought global air travel to a halt and closed businesses. But currently, the Russia-Ukraine war has sent oil prices skyrocketing worldwide.
If anything, this price volatility highlights the potential risks and rewards of investing in oil. If you time it right, it can be an incredibly lucrative commodity. But it's also so important that global events can have a massive, unforeseen impact on prices and your investment.
The Ethical Issues Surrounding Oil Drilling
Investors interested in ESG investing (environmental, social, and governance) might be concerned about the ethics of investing in oil companies. After all, fossil fuels are one the leading causes of CO2 emissions. Because greenhouse gas emissions like CO2 trap the sun’s heat on the earth's surface, they are one of the leading causes of climate change — an existential threat to our continued existence on this planet.
Investors who want to make a difference in their investments and are concerned about the climate risks posed by fossil fuels might not want to invest in oil companies. In fact, some large funds, such as public pension funds, are divesting from fossil fuels. The University of California, for example, removed all fossil fuel investments from its $126 billion investment portfolio in 2020. Many investors moving away from fossil fuels cited the concern over climate change and the environmental issues of oil drilling, such as oil spills and waste.
In some cases, oil companies are included in ESG funds. That’s because ESG doesn’t just consider climate; it includes diversity and how a company treats its employees. It’s also worth noting that oil companies are some of the most prominent investors in renewable energy. BP, for example, plans to slash its oil output by 40% and boost its energy from renewable sources by 50 gigawatts or the equivalent of the power produced by 50 nuclear plants.
While some investors might be okay with investing in an oil company, others might prefer to put their money elsewhere. Ultimately, whether you should invest in oil companies or not comes down to your ethics.
Sustainable Alternatives to Investing in Oil
Oil investing isn’t the only way to invest in energy. Investors who want to get exposure to energy but don’t want to invest in companies that use fossil fuels could consider investing in more sustainable options like green energy.
Renewable energy companies, for example, create energy from natural sources that can replenish themselves, such as wind and solar. First Solar, for instance, is one of the leading solar panel makers in the world, while NextEra Energy is one of the most significant wind and solar energy producers and invests both in renewable energy and storage. However, energy levels can fall if the sun isn’t shining or water levels are low.
Nuclear energy is another common alternative to fossil fuels. Nuclear power is derived from splitting a uranium atom in a power station using nuclear fission. Since no fuel is burned, it has zero greenhouse gas emissions. However, nuclear energy can be hazardous and produces radioactive waste which can be challenging to dispose of properly. Some leading companies in the nuclear energy sector include Nuscale Power, Centrus Energy, and Cameco Corp.
Pros & Cons of Investing in Oil
- Oil is a global, valuable commodity that isn't going anywhere anytime soon
- You can invest in oil without much money thanks to fractional shares
- Potential to earn dividend income from various oil ETFs and stocks
- Might not line up with certain ESG investing values
- Oil prices can be volatile and impacted by world events, especially geopolitical ones
Investing in oil can be lucrative, and you certainly have numerous options to get started. But, as mentioned, know that this commodity can have massive swings in price depending on geopolitical events and factors outside investors' control.
It's also worth mentioning that oil doesn't have to be your only energy investment. Clean energy stocks or renewable energy stocks are also exciting opportunities. And even more niche sectors, like solid-state battery stocks, could provide great returns.
Ultimately, it would help if you outlined your risk tolerance and overall goals before investing in oil and gas. But there's no reason part of your portfolio can't involve this commodity, as long as you do your research and understand the risks.
More investing opportunities:
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