How Do I Invest in Oil? Direct and Indirect Options

Investors have many ways to bet on the direction of crude oil prices. The alternatives range from crude oil futures and options to exchange-traded derivatives, energy equities and sector mutual funds. Each of these choices has particular risks, and all of them involve exposure to one of the world’s most volatile commodities.

  • Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.
  • The alternative is also unappealing, as a spike in production would cause crude prices to crater.
  • In November 2021, USO agreed to pay a combined $2.5 million in penalties to the U.S.
  • The world’s largest oil-exporting nations include members of OPEC (Organization of the Petroleum Exporting Countries), a cartel that works to coordinate members’ oil policies.
  • The above content provided and paid for by Public and is for general informational purposes only.

Master limited partnerships, or MLPs, are publicly traded companies that own pieces of energy infrastructure such as pipelines. These tend to pay high dividends, Jones says, and they are popular with retail investors. Oilfield services companies can also see big swings in profitability driven by oil prices. If oil prices go down, drilling becomes less profitable, and producers are less likely to spend money on equipment and services. If the price goes up, producers may spend more on oilfield services as they try to reach reserves that are more difficult to extract.

Exploration and production

Oil stocks could return to their market-beating ways thanks to OPEC+’s surprise production cut. An author, teacher & investing expert with nearly two decades experience as an investment portfolio manager and chief financial officer for a real estate holding company. Before investing in petroleum, consider working with a financial advisor to see if there are other commodities that would be a good fit for your portfolio. Vanguard Energy Fund Investor Shares (VGENX), Fidelity Select Energy Portfolio (FSENX) and Oil & Gas ULtraSector ProFund (ENPIX) are examples of energy mutual funds.

  • Companies involved in the production, transportation, and refining of crude oil are commonly referred to as oil stocks.
  • SmartAsset does not review the ongoing performance of any RIA/IAR, participate in the management of any user’s account by an RIA/IAR or provide advice regarding specific investments.
  • Meanwhile, it imports other types of oil to maximize its production based on refining capacity.
  • This process enables these companies to generate lots of cash, the bulk of which they use to either grow their operations or reward shareholders through dividends and buybacks.

And as we mentioned in the introduction, despite the continuing growth of alternative energy sources, oil will remain a worthwhile investment. And oil stocks can be a way for risk-averse investors to have exposure to the oil sector without dabbling in the commodities market. For example, when the Covid-19 pandemic caused millions of offices and businesses to close, it had a devastating effect on the oil and gas sector. In fact, at one point, the futures contract for a barrel of oil turned negative.

The Best Oil Stocks of October 2023

One of the largest oil companies on the planet, ExxonMobil is a fully integrated supermajor. It operates in every segment of the oil and gas industry, including E&P, midstream, petrochemical manufacturing, refining, and, even further downstream, marketing refined and petroleum products to customers. Crude oil ETFs invest in crude oil futures themselves in an attempt to track the performance of the underlying commodity index. But what makes Canadian Natural stock a good stock to invest in today?

US oil producers should be concerned that industry giant Saudi Arabia could reverse its supply cuts and flood the market, thereby bolstering its competitive position while driving prices even lower. If they limit production, they’ll have fewer exports but will boost profit margins. However, higher oil prices would further weigh on demand from consumers and businesses, which raises the risk of causing — or worsening — a recession. ExxonMobil and Chevron, in particular, are traditionally well-known for their consistent dividend payouts to shareholders, which makes oil stocks, in general, an attractive investment option. The historically stable and profitable nature of these companies, which are considered blue-chip stocks, could be viewed as a contributing factor to their consistent dividend payouts. If you’re interested in stocks, ETFs, or mutual funds, you should start learning about stock trends and explore where you’d like to open up a stock account.

Earn Dividends

Regardless of the underlying reasons for changes in oil prices, investors who want to invest in oil markets and capitalize on energy price fluctuations have a number of options. The bulk of oil trading takes place in derivatives markets, utilizing futures and options contracts. These may be out of reach for many individual investors, but there are several other routes to add oil to your portfolio.

Adjusting Your Portfolio for the New Normal Higher Interest Rates in Canada

EOG, which generated a total return of 57% last year, is off by about 6% so far in 2023. However, the stock has rallied 8% since hitting a year-to-date closing low in mid-March, and the Street sees more outperformance ahead. Raymond James analyst John Freeman (Strong Buy) adds that the Biden administration’s recent approval of COP’s Alaska Willow Project is another long-term tailwind for the company. At its peak, Willow is expected to produce a sum of oil equivalent to nearly 40% of the state’s current oil production, Freeman writes. While the S&P 500 generated a total return of 7.5% in the first quarter, XLE’s total return amounted to -4.3%. As with any industries, the oil patch has its own dubious stocks that are characterized by lousy assets operated by fishy management.

My 3 Favourite TSX Energy Stocks for October 2023

By understanding the basics of the industry and the different methods of investing, you’ll already be ahead of the curve when it comes time to make your first significant investment. With the outlook for oil stocks suddenly much more bullish, it seemed like a good time to see which S&P 500 exploration and production oil stocks get the highest recommendations from industry analysts. If capital thinkmarkets review appreciation is what you desire, you may consider small-cap oil and gas companies that tend to be more aggressive in the pursuit of production growth than large-cap producers. Additionally, I believe oilfield service vendors stand to benefit massively in the back half of the oil bull market. When you buy a standard futures contract you literally purchase a quantity of the asset in question.

In November 2021, USO agreed to pay a combined $2.5 million in penalties to the U.S. Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to settle allegations it failed to disclose in a timely manner the position limits imposed by its broker. These are companies that make equipment used in the massively complex process of drilling and extracting oil. This includes drilling gear, testing and safety tools, and other heavy-duty components.

You can invest in oil-related stocks, oil mutual funds and oil futures. To buy or sell oil investments, you’ll need to have a brokerage account. Business is a lot less certain for participants in the oil and gas industry these days.

However, investors should be extremely cautious with this asset class. Options are sophisticated products that can cost more than they seem, while futures contracts can end up triggering significant losses. Derivatives are financial products that take their value from some underlying instaforex review asset. Futures contracts and options contracts are the most common forms on the market, with each taking its value from the product they represent. Most futures and many options are based on commodities, and this is the best way to directly invest in the price of oil.

How oil refiners make money

These geopolitical issues affect supply and demand—and oil prices, as a result. Investing in companies that will benefit from changes in oil prices provides an easier and safer way for most people to invest in oil—and will often pay investors in the form of dividends, as well. Each 42-gallon barrel of crude oil typically produces about 45 gallons of petroleum products because of refinery processing gains. The largest finished product is gasoline, at 19 gallons from each barrel of oil.

Despite record profits, capital discipline is still the management mantra in Houston. According to Dallas Fed Energy Survey, the oil industry business activity index hovered around 50 over the past five quarters, although WTI rose from $50 to $130 per barrel during that time (Fig. 2). Oil is closely tied with the overall economy, so much so that many people consider it essentially a proxy for the national, even international, economy.

However, review trading systems can be complex and requires a thorough understanding of the industry, as well as the various factors that impact stock prices. In this article, we will provide a guide on how to invest in oil stocks, including factors to consider before investing, different types of oil stocks, and ways to improve your comprehension of the oil market. Whether you are a seasoned investor or a beginner, this article will provide valuable insights and tips to help you navigate the world of oil stocks and make informed investment decisions. Futures are more advanced than investing in oil stocks or funds and should be approached with caution.

The global economy uses oil in many different ways including the gasoline that powers our cars, diesel fuel that’s essential in the trucking industry, jet fuel required for air travel. Oil is also necessary to heat and cool our homes as well as to power factories. But it has been more opportunistic with share repurchases this year, given the 20% decline in its stock price from its 52-week high. The dividend’s decline should end now that oil prices have rallied and will likely begin heading higher. Meanwhile, the Street’s average target price of $144.87 gives EOG stock implied upside of about 23% in the next year or so.

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