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During the pandemic, oil demand plummeted due to restricted mobility, causing a historic drop in prices, with U.S. crude oil futures, specifically West Texas Intermediate (WTI), trading at negative levels in April 2020. Prices rebounded as demand recovered, surging above $125 per barrel after Russia’s invasion of Ukraine in February 2022. Since then, prices have stabilized but remain high despite the global economic slowdown caused by monetary tightening.
This volatility highlights oil’s essential role in driving economic growth. Even as renewable energy use increases and efforts to reduce fossil fuel consumption continue, oil continues to be one of the most sought-after investment assets.
In this guide, we discuss how to invest in oil and identify the best oil investment opportunities for traders.
Key Takeaways
- Understanding how to invest in the oil industry involves considering various methods, each with its own set of complexities and potential rewards.
- Some of the most popular investments include physical oil, oil futures, ETFs, oil company stocks, MLPs, and oil and gas royalty trusts.
- Most oil trading occurs in futures and derivatives markets.
- Buying physical oil is not common for retail investors due to the high costs of storage and delivery.
- Successful oil investing involves using fundamental analysis, technical analysis, and seasonal analysis.
- Investing in oil is highly volatile due to factors like geopolitical tensions, regulatory changes, and market dynamics.
- Oil investing is generally more suitable for experienced traders who understand the risks involved.
- Show Full Guide
How to Invest in Oil in 2024: From Physical Oil to ETFs & CFDs
Depending on your risk appetite and financial goals, there are different ways to invest in oil. You can choose to buy physical oil, invest in oil futures, or trade derivatives that track oil price movements.
These diverse oil investment opportunities allow investors to adjust their portfolios based on their risk tolerance and knowledge, aiming to either maximize profits or minimize losses in one of the most heavily traded assets.
Direct Investments in Oil
Wondering how can you invest in oil? Investors seeking direct exposure to oil can choose between buying the physical commodity or using futures and options.
Physical Oil
Buying physical oil is much less common because, unlike gold, individual investors cannot easily buy a barrel of oil. The exorbitant cost of storing and delivering oil makes this impractical.
Buyers of crude oil delivered through pipelines typically need storage with a minimum capacity of 25,000 barrels. For seaborne cargoes, an average storage capacity of 700,000 barrels is required, according to S&P Global.
Additionally, oil has end users, such as refining companies that process crude oil into gasoline, diesel, jet fuel, and other petroleum products.
Lukman Leong, a Jakarta-based independent analyst, explains: “Gold has been used for centuries both as currency and as an investment. Physically, gold cannot be diminished.”
“In contrast, oil serves no purpose other than to be burned for transportation. Once used, oil is gone, although petroleum products can be recycled. Therefore, we don’t want to purchase physical oil because it is not necessary for us.”
Pros and Cons of Investing in Physical Oil
- Direct ownership
- Tangible asset
- Inflation hedge
- Control over asset
- High storage and transportation costs
- Requires significant capital
- Risk of spoilage and degradation
- Limited liquidity
Oil Futures
Trading oil through futures contracts is a practical way for investors to gain direct exposure to oil.
A futures contract is an agreement to buy a specific amount of a commodity at a set price on a future date. Buyers must purchase the commodity, while sellers must deliver it by the contract’s expiry date. On expiry, the contract can be settled through physical delivery of oil or cash, though traders often roll over the contract to extend their exposure to oil prices.
Oil futures contracts are popular for direct oil investment. Producers and industrial buyers use these contracts to lock in prices and manage costs, while most investors use them to speculate on oil prices.
For example, a trader might agree to buy oil in three months at $80 per barrel. If the price rises to $90 per barrel by the expiry date, the trader profits $10 per barrel. Conversely, if prices fall, the trader incurs losses.
Investing in oil futures also involves additional costs due to market conditions like backwardation and contango.
- Backwardation occurs when future prices are lower than the current spot price, indicating anticipated price drops. For example, if oil costs $85 per barrel now, a three-month future contract might be $75 per barrel, reflecting a surge in demand or a supply squeeze.
- Contango is the opposite, with future prices higher than the current spot price, suggesting expected price increases due to a surplus or high storage costs.
Pros and Cons of Investing in Oil Futures
- High potential returns
- Leverage opportunities
- Liquidity
- Hedging against price movements
- Access to global markets
- Speculative opportunities
- High volatility and risk
- Margin calls and potential for large losses
- Complexity and need for expertise
- Time-sensitive contracts (expiry dates)
- Contango and backwardation issues
- Requires significant capital and monitoring
Oil Options
Oil options trading is similar to futures trading as it involves oil as the underlying asset. Unlike futures, however, options give investors the right, but not the obligation, to buy or sell the asset at an agreed price, known as a strike price, before or on the expiry date. Investors decide whether to exercise this right based on market conditions.
There are two types of options: call and put.
| Feature | Call Option | Put Option |
| Purpose | Right to buy oil at the strike price | Right to sell oil at the strike price |
| Premium | Paid by the investor to purchase the call option | Paid by the investor to purchase the put option |
| Exercise | Investors can buy oil at the strike price | Investors can sell oil at the strike price |
| Market Condition | Beneficial if oil prices rise above the strike price | Beneficial if oil prices fall below the strike price |
| Obligation | No obligation to buy, only the right | No obligation to sell, only the right |
| Risk | Limited to the premium paid | |
| Expiry Date | Option can be exercised on or before the expiry date | |
| Application | Used when expecting an increase in oil prices | Used when expecting a decrease in oil prices |
Pros and Cons of Investing in Oil Options
- Limited risk (premium paid)
- Potential for high returns
- Flexibility (buy/sell rights)
- Hedging opportunities
- Leverage
- Diversification
- High volatility and risk
- Complexity and need for expertise
- Time decay can erode the value
- Requires careful timing
- Can be expensive (premium costs)
- Not suitable for all investors
Indirect Investment in Oil
The downside of direct investing in oil through futures contracts is that it typically requires substantial capital, making it out of reach for most investors. However, other oil investment opportunities are available at more affordable prices.
Oil Stocks
Buying stocks of an oil company is another oil investment opportunity. An oil company’s share price often moves in tandem with oil prices. When oil prices increase, the company’s share price typically rises as well, as they can sell their oil products at higher prices, generating higher revenue and profit.
While investors need to track oil price movements with futures contracts, ETFs, and CFDs, buying oil stocks requires monitoring the company’s corporate actions, such as changes in management and other fundamentals.
Lukman Leong, a Jakarta-based independent analyst, explained: “For oil prices, we only need to monitor the prospects of oil demand and supply.”
“But with oil stocks, we have to pay more attention to their corporate actions, such as their cash flow or their future projects. These factors have an indirect relationship with oil prices, although the share price responds to oil price movements.”
Popular Oil Stocks
There are many oil companies to invest in. Based on market capitalization, the following are the top five global oil companies:
- Saudi Aramco (2222.SR)
- Exxon Mobil (XOM)
- Chevron (CVX)
- Shell (SHEL)
- PetroChina (PTR)
Pros and Cons of Investing in Oil Stocks
- Potential for dividends
- Ownership in established companies
- Diversification within oil sector
- Liquidity
- Long-term growth potential
- Inflation hedge
- Exposure to market volatility
- Subject to company-specific risks
- Requires analysis of company fundamentals
- Geopolitical risks
Oil ETFs & ETNs
Exchange Traded Funds (ETFs) have gained popularity as investment vehicles that offer retail investors exposure to a diversified portfolio of assets, often with lower risks and capital requirements compared to futures contracts. ETFs provide several benefits, including portfolio diversification and cost efficiency.
ETF shares are traded on stock exchanges, allowing investors to buy and sell them like individual stocks.
How Does Investing in an Oil ETF Work?
Investing in an oil ETF allows investors to put their money into several oil futures or oil company stocks by buying a single ETF share. This provides exposure to the oil markets without the need to buy individual oil futures contracts or oil stocks.
Popular Oil ETFs
Based on data released by the finance company VettaFi, the three most popular oil ETFs in the U.S. market are:
- United States Oil Fund (USO)
- ProShares Ultra Bloomberg Crude Oil (UCO)
- Invesco DB Oil Fund (DBO)
Pros and Cons of Investing in Oil ETFs & ETNs
- Diversification
- Liquidity
- Lower capital requirement
- Easy to trade
- Access to various markets
- Transparent pricing
- Management fees
- Indirect exposure to oil prices
- Tracking error
- Market volatility
- Possible underperformance compared to direct investments
- Counterparty risk (for ETNs)
Oil CFDs
A contract for difference (CFD) is a contract between a buyer and a seller to exchange the difference in the price of an underlying asset from the time the contract is opened to when it is closed. CFDs allow traders to speculate on the price movements of the underlying asset without actually owning it.
In the case of oil investments, CFDs are used to trade the difference between the price of oil when the contract is opened and when it is closed.
CFD trading is typically leveraged, so investors pay a small deposit known as the margin to gain full exposure to the value of the underlying asset. CFD providers decide the rate of the initial deposit or the margin.
For example, if an investor wants to open an oil position worth $8,000, they would only need to pay a 10% margin, which would be $800.
Pros and Cons of Investing in Oil CFDs
- Leverage opportunities
- No need for physical ownership
- Ability to go long or short
- Low initial capital required
- Access to global markets
- Flexibility and liquidity
- High risk of substantial losses
- Subject to overnight fees
- High volatility
- Complexity and need for expertise
- Potential for margin calls
- Regulatory restrictions
Alternative Methods
In addition to trading oil through conventional securities, investors could consider other alternatives, such as Master Limited Partnerships (MLPs) and Oil and Gas Royalty Trusts.
Master Limited Partnerships (MLPs)
A Master Limited Partnership (MLP) is an investment structure that blends elements of partnerships and corporations. It pools funds from investors to manage investment projects and operations.
MLPs have two participant types: general partners, who manage the business, and limited partners, who invest but don’t manage.
Often publicly traded, MLPs let investors buy and sell shares on stock markets, providing returns without involving them in management.
Investors favor MLPs for their consistent and reliable income, as they distribute up to 90% of their earnings to holders. This is because MLPs don’t pay corporate taxes; instead, investors pay taxes on their distributions.
Energy-focused MLPs typically involve midstream operations like oil and gas pipelines, LNG facilities, and shipping terminals. Tom Bailey, Head of Research at HANetf, the issuer of the Alerian Midstream Energy Dividend UCITS ETF (MMLP), suggests that investors seeking oil and gas exposure should consider such energy companies, as they are generally less volatile than commodity prices.
Baily said: “These companies also have strong, steady cashflows. As a result, one of the key draws to this space is its income potential.”
“The companies that perform the transportation and handling function within energy usually provide their services for fees under long-term inflation-linked contracts. As a result, such firms have stable cash flows and strong dividend payments.”
HANetf’s Alerian Midstream Energy Dividend UCITS ETF (MMLP), for example, offers a portfolio of midstream energy companies that process, transport, and store oil, natural gas, and natural gas liquids in the U.S. and Canadian markets.
Oil and Gas Royal Trust
Oil and gas royal trusts generate income from the production of natural resources, such as oil. According to the Gana Weinstein law firm, their value is influenced by commodity price fluctuations and production levels.
Royalty trusts, managed by financial entities like banks, are traded like stocks. A separate company extracts the resources and pays royalties to the trust.
Benefits and Risks of Investing in Oil
Investment in the oil sector comes with its own set of benefits and risks.
Oil Investment Benefits
While oil’s notorious price swings are certainly not for the faint-hearted, investing in oil has its advantages.
| Aspect | Details |
| Hedging | Investing in oil helps companies manage energy costs by locking in prices and reducing volatility, especially for energy-intensive industries like airlines, shipping, and plastics. |
| Diversification | Oil investments diversify portfolios, reducing risks from single-asset investments (e.g., bonds, stocks, currencies, crypto). Oil often has a low correlation with other assets, mitigating losses during downturns or supply disruptions. |
| Speculation | Investors can achieve significant returns by buying oil futures at lower prices and selling them higher in the future or by trading the price differences between the market’s open and close. |
| Income Generation | Certain oil investments, such as MLPs and Royalty Trusts, provide regular income through dividends and royalties, appealing to income-focused investors. |
Oil Investment Risks
Like any financial asset, oil investments carry significant risks.
| Aspect | Details |
| Price Volatility | Oil prices are highly volatile, often more so than other markets. They can swing drastically due to geopolitical tensions, OPEC+ production changes, or supply disruptions from technical or weather-related issues. |
| Regulatory Risks | The oil industry is subject to stringent regulations that can impact profitability and operations. Changes in environmental policies and government regulations can significantly affect oil investments. |
| Environmental Concerns | Environmental regulations and the global shift towards renewable energy can affect oil investments. The increasing emphasis on reducing carbon emissions can lead to reduced demand for oil. |
| Operational Risks | Risks related to exploration, production, and distribution can impact the performance of oil investments. Accidents, equipment failures, and natural disasters can lead to significant losses. |
How to Successfully Analyze Oil Markets
Investing in oil markets involves more than just predicting price direction by assessing supply and demand.
Fundamental Analysis
Supply and demand dynamics are critical in oil trading as they significantly affect market sentiment.
On the supply side, multiple factors can influence oil availability:
- Geopolitical events. Wars or political unrest in major oil-producing regions, such as the current conflict between Hamas and Israel or Russia’s invasion of Ukraine, can threaten supply.
- Infrastructure attacks. Energy infrastructure, including oil transmission and distribution pipelines, storage facilities, and loading terminals, are often targeted during conflicts.
- Natural disasters. Events like floods or hurricanes can disrupt oil drilling and shipping activities.
- OPEC policies. Oil production policies employed by OPEC and its non-OPEC allies play a crucial role in managing the global oil supply.
On the demand side, factors that can reduce consumption include:
- Economic conditions. Weak economic growth can lower oil demand.
- Consumption restrictions. Events like the COVID-19 pandemic, which limited travel, significantly reduced oil consumption.
Several international institutions provide monthly and annual data on oil supply and demand, offering guidelines for forecasting oil prices. Key reports include:
- OPEC’s Monthly Oil Report
- U.S. Energy Information Administration’s (EIA) Monthly Short-Term Energy Outlook and Weekly Petroleum Status Report
- International Energy Agency’s (IEA) Monthly Oil Report
Additionally, reports from major oil-consuming countries, such as China—the world’s largest fossil fuel consumer—are crucial for oil investors to gauge price direction.
Technical Analysis
Technical analysis methods, commonly used to analyze other assets like share prices and indices, can also be applied to oil prices to forecast future trends. Here are some common methods:
MA involves calculating the average price of an asset over a specific period to smooth out short-term fluctuations and reveal the overall trend. Instead of focusing on daily highs or lows of oil prices, a moving average provides a clearer view of the price direction by averaging prices over days, weeks, months, or even years.
Common moving averages include the 50-day and 200-day moving averages.
The RSI indicator helps investors determine whether an asset, such as oil, is overbought or oversold. An asset is considered overbought if the RSI score is above 70, suggesting that its price might be due for a drop. Conversely, an RSI score below 30 indicates that the asset might be oversold and could potentially increase in price. RSI assists investors in making decisions about buying or selling based on these signals.
These technical analysis methods provide investors with tools to better understand and predict oil price movements, aiding in more informed trading decisions.
These technical analysis methods provide investors with tools to better understand and predict oil price movements, aiding in more informed trading decisions.
Seasonal Analysis
Every asset typically has its seasonal cycle, which can indicate periods of increased or decreased demand. For oil, these cycles are particularly pronounced. Understanding seasonal patterns can help investors predict changes in oil prices and adjust their trading strategies accordingly.
During summer, there is often a potential rise in oil demand due to increased travel for summer holidays and higher electricity usage for cooling in hot weather. This seasonal uptick in demand can lead to higher oil prices.
Winter usually sees a seasonally high demand for heating oil. However, recent trends in climate change have made winters unusually warmer, reducing the demand for heating oil. This reduction in seasonal demand can lead to subdued oil prices.
Where to Invest in Oil in 2024
In 2024, you can invest in oil through an online stock broker. Regulated in the US, UK, and Europe, eToro offers several ways to invest in oil, including CFDs, ETFs, stocks of oil companies, and commodity indices.
eToro also offers advanced charting software, market news, and a sentiment tracker to help you choose the best oil stocks. Additionally, eToro’s copy trading feature allows you to mimic experienced traders’ portfolios.
Available in over 100 countries, new users can open an account with as little as $100, with no deposit fees, making your first trade affordable and easy.
The Bottom Line: Should You Invest in Oil?
Despite its volatility, oil presents investors with an alternative for diversifying their investment portfolios. It also provides opportunities to generate profit from the difference between current and future prices.
However, investing in oil is generally more suitable for professional traders who understand and have experience with the risks associated with oil investments. For novice investors, it is crucial to thoroughly research and understand how to invest in oil, considering the complexities and potential pitfalls of the oil market before committing capital.
Do your own research and always remember your investment decision depends on your attitude to risk, your expertise in the commodity market, the spread of your portfolio, and how comfortable you feel about losing money.
The information in this guide does not constitute investment advice and is meant for informational purposes only.
FAQs
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References
- Specifications Guide Americas Crude Oil (Spglobal)
- Saudi Aramco (2222.SR) – Market capitalization (Companiesmarketcap)
- Crude Oil ETF List (Etfdb)
- Oil and Gas Royalty Trusts :: Investment Fraud Attorney Gana Weinstein LLP (Ganalawfirm)
