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. All can be purchased through an online brokerage account or a full-service broker.
Key Takeaways
- Crude oil is a volatile commodity essential to global transportation and manufacturing.
- Investors can speculate on the price of crude by trading oil futures and options, related ETFs and ETNs and energy stocks, directly or through ETFs and mutual funds.
- Commodity and midstream exchange-traded funds are subject to tracking error, meaning they may not deliver the return of the underlying index or crude oil prices.
Oil as an Asset
Oil is an economically crucial resource, providing the bulk of energy for transportation as well as raw materials for manufacturing. It is the world's most heavily traded commodity. Because crude oil is so essential and the process of producing it is lengthy, consumers as well as suppliers are notoriously slow to adjust consumption and production as prices rise or fall. That means oil prices must move further to rebalance markets in the wake of disruptions such as a drop in demand caused by a pandemic or an interruption of supply stemming from war or economic sanctions.
Oil prices are set globally in a variety of spot and futures markets for crude as well as related products by market participants including producers, consumers, short-term speculators and longer-term investors.
While energy prices tend to be volatile, the markets setting them are highly liquid and market participants typically well-informed. Traders without extensive expertise should proceed cautiously.
Oil Futures, Options and Spot Markets
You could buy crude outright in the spot market, if you had deep pockets and sufficient storage facilities to accommodate a shipment of 600,000 barrels from a tanker or even 25,000 barrels a month via pipeline.
For most, crude oil futures or options on oil futures will be the more realistic alternative. On the CME Globex futures exchange, a single crude contract represents 1,000 barrels. To trade futures through an online brokerage account you will need to obtain margin and pass a broker's suitability review, not a particularly tough task these days.
The process typically requires completing an online application and waiting a few days. Some brokerages require a minimum account value to authorize 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).
Some crude oil futures contracts use cash settlement at expiration while others require the transfer of crude at a pre-specified delivery point.
Crude oil producers and consumers use futures to hedge production revenue and energy costs respectively. Speculators trying to profit from short-term price changes are less likely to take delivery of the underlying commodity at a future contract's expiration.
In April 2020 the price of the expiring May West Texas Intermediate crude oil futures fell to -$37 per barrel shortly before expiration, meaning traders were willing to pay to avoid having to take delivery of crude with storage facilities full in the early stages of the COVID-19 pandemic.
Commodity ETFs and ETNs
In recent years, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) have sprung up to offer crude oil exposure for retail investors not able or willing to trade commodity futures.
Crude oil ETFs invest in crude oil futures themselves in an attempt to track the performance of the underlying commodity index. Because crude oil futures are often in contango, commodity ETFs like the United States Oil Fund (USO) must often to pay up to roll expiring futures contracts into the next month, introducing one potential source of tracking error.
USO's investment objective is to provide average daily return within 10% of the average daily return of the front-month contract for West Texas Intermediate crude oil over any 30-day period. In 2020, oil market dislocations and position limits imposed by future exchanges as well as the fund's futures broker effectively blocked the fund from deploying investment inflows into front-month crude oil futures for a time. While the fund has continued to meet its investment objective by investing in longer-dated oil futures as well as the front-month contract, it acknowledges increased uncertainty about its ability to stay within the specified tracking error limit in the future.
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.
Because commodity ETFs frequently suffer from negative roll yield as futures contracts expire, they're suitable for short-term speculation only. With oil prices at seven-year highs above $100 per barrel in March 2022, the USO's price was down nearly 90% since launch in 2006 as of March 1, 2022. As of the same date, USO's sister fund investing in crude oil futures expiring over the next year, the United States 12 Month Oil Fund (USL), was down 44% since inception in 2007.
The Invesco DB Oil Fund (DBO) is another commodity ETF. It invests in crude oil futures up to 13 months out based on a methodology seeking to minimize negative roll yields and maximize positive ones. DBO, which had market value of $506.7 million compared with USO's $2.9 billion as of March 1, 2022, had returned a cumulative -2.6% since launch in 2007.
In contrast with commodity ETFs, commodity ETNs including iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL) and Credit Suisse X-Links Crude Oil Shares Covered Call ETN (USOI) represent contracts between investors and the issuer. The issuer will very likely use crude oil futures contracts to offset its exposure, but the ETN itself holds no assets. ETN returns are not subject to tracking error, but pose counterparty risk, because they are unsecured debt obligations.
Another advantage of commodity ETNs is that capital gains taxes are deferred until the position is sold, while gains on commodity ETFs are taxed annually even if they remain in the portfolio.
Commodity ETFs as well as ETNs may allow the issuer to redeem them under certain circ*mstances.
Energy Stocks, Equity ETFs and Mutual Funds
Investors can also gain exposure to oil by purchasing related equities directly, or through energy-sector ETFs and mutual funds. While energy stocks come with their own risks, ETFs and mutual funds offer diversification within the sector.
The Energy Select Sector SPDR Fund (XLE) is a leading energy ETF representing energy stocks in the S&P 500 index, a large-cap benchmark. With a market value of more than $36 billion as of March 1, 2022, XLE includes the largest integrated oil companies in the U.S. As of the same date, Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) together accounted for more than 44% of XLE's portfolio.
The iShares Global Energy ETF (IXC) provides exposure to the largest energy companies globally. Exxon and Chevron accounted for about 26% of the $2 billion fund's portfolio in March 2022, followed among top holdings by Shell Plc. (SHEL), ConocoPhillips (COP), TotalEnergies (TTE), BP Plc (BP), and Enbridge Inc. (ENB).
ETFs, including the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), and theInvesco Dynamic Energy Exploration & Production Portfolio (PXE), focus on upstream U.S. oil and gas producers. XOP is the only one of the three to exclude crude refiners.
U.S. and overseas crude refiners are the sole focus of the VanEck Vectors Oil Refiners ETF (CRAK). The VanEck Vectors Oil Services ETF (OIH) represents oilfield services and drilling rig providers, with Schlumberger NV (SLB), Halliburton Company (HAL), and Baker Hughes Company (BKR) accounting for 39% of the portfolio in the aggregate.
The JP Morgan Alerian MLP Index ETN (AMJ) is an exchange-traded note representing the largest U.S. energy pipeline operators, sometimes also called the midstream sector. The ETRACS Alerian Midstream Energy Index ETN (AMNA), sponsored by UBS (UBS), is a similar offering. Because the midstream sector includes master limited partnerships, midstream ETFs (as opposed to ETNs) tend to lag in performance because they cannot take advantage of certain MLP tax benefits.
The Vanguard Energy Fund Investor Shares (VGENX) and Fidelity Select Energy (FSENX) are among the largest mutual funds focused on energy.
Advisor Insight
Rebecca Dawson
Dawson Capital, San Mateo, CA
There are many ways that you can invest in oil commodities. You can even buy actual oil by the barrel.
Crude oil trades on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodities exchanges around the world. Futures contracts are agreements to deliver a quantity of a commodity at a fixed price and date in the future.
Oil options are another way to buy oil. Options contracts give the buyer or seller the option to trade oil on a future date. If you choose to buy futures or options directly in oil, you will need to trade them on a commodities exchange.
The more common way to invest in oil for the average investor is to buy shares of an oil ETF.
Finally, you can also invest in oil through indirect exposure by owning various oil companies.
FAQs
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.
Is there a way to invest in oil? ›
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.
How to invest in oil in the ground? ›
How To Invest In Oil and Gas Wells?
- Oil and Gas Futures Contracts. ...
- Buying Mineral Rights. ...
- Buying Stocks In Oil and Gas Companies. ...
- ETFs and Mutual Funds. ...
- Equity Direct Participation Programs. ...
- Private Placement. ...
- Oil and Gas Wells with DPP. ...
- Upstream Companies.
A financial consultant, investment manager, or investment broker will be able to look at your portfolio of assets and help you make an informed decision on how much you should be investing in an oil well. Investing in an oil well is usually a large investment ranging from $100,000 to over 1 million dollars USD.
Is oil a risky investment? ›
Investing in an oil fund is generally considered safer than investing in a single oil stock, because of the diversification offered by a fund, which holds many investments. Investing in oil futures is often considered more risky.
Is oil a high risk investment? ›
Ratios above 1.00 indicate higher risk than average. ProShares K-1 Free Crude Oil Strategy has a high total risk index of 2.33 because of its standard deviation of 35.2%. The category risk index relates the volatility of an ETF to the average volatility for ETFs in the same investment category.
Can you buy oil like a stock? ›
You can invest in oil indirectly by purchasing shares in oil companies, such as Exxon Mobil or BP. This strategy is the most accessible for experienced investors, as it's the same process as buying shares in any sector.
Are oil stocks profitable? ›
Benefits of investing in oil and gas
Oil and gas stocks can produce significant capital gains from share price appreciation and attractive dividend income during periods of high oil and gas prices.
How do I start trading in oil? ›
Steps to buying and selling crude oil
- Understand what oil trading is.
- Learn what moves the price of oil.
- Decide how you want to trade oil with us.
- Create your trading account.
- Find your opportunity.
- Open your first oil trade.
- Monitor and close your position.
Oil stocks are the biggest winners in the S&P 500, enjoying a rise of over 100% so far in 2022, according to data from online trading platform CMC Markets. If the upward trend continues, investors looking to take advantage of the S&P 500 best performers could do well from crude oil stocks.
The largest oil in the world is Aramco, with a 2022 revenue of $604.3 billion. As of 2022, the global oil industry has a market size of $6.819 trillion. Over 6.8 billion barrels of oil are produced in the U.S. each year.
What are the cons of investing in oil? ›
The main disadvantage of investing in oil is volatility. Like most commodities, oil is heavily affected by global demand, supply, and technological factors. Global Demand: When oil demand falls, the oil price decreases since people aren't as willing to pay for oil. Also, there's only a finite amount of oil reserves.
Will oil hit $100? ›
Goldman Sachs (GS) also raised its Brent forecast after the OPEC+ announcement — from $90 to $95 a barrel by the end of the year. The bank has also projected Brent to hit $100 by the end of 2024.
Will oil go to $100? ›
Oil prices, which have slumped by 40 per cent, after adjusted for inflation, in one year since March 8, 2022 high are likely to creep back toward $100 in the second half of 2023 despite fears of rising interest rates, major oil traders say.
What are the best oil stocks to buy right now? ›
Comparison Results
| Name | Price | Analyst Price Target |
|---|
| BP BP | $35.81 | $46.25 (29.15% Upside) |
| PXD Pioneer Natural | $204.78 | $255.76 (24.90% Upside) |
| SLB Schlumberger | $44.07 | $65.71 (49.10% Upside) |
| XOM Exxon Mobil | $105.78 | $130.54 (23.41% Upside) |
5 more rowsThe average net profit margin for oil and gas production was 4.7% in 2021 and 31.3% in Q4 2021.
What is the riskiest investment in market? ›
Over many decades, the investment that has provided the highest average rate of return has been stocks. But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments.
What are the benefits of investing in oil? ›
A STRONG COMBINATION OF INVESTMENT ADVANTAGES
- TAX INCENTIVES.
- HIGH ROI POTENTIAL.
- LONG TERM PASSIVE INCOME GENERATION.
- PORTFOLIO DIVERSIFICATION.
Buying and Selling Volatility
Traders can benefit from volatile oil prices by using derivative strategies. These mostly consist of simultaneously buying and selling options and taking positions in futures contracts on the exchanges offering crude oil derivative products.
Can oil only be traded in dollars? ›
Producers and purchasers use the petrodollar system to trade crude oil. Petrodollars are not a separate currency. Instead, trade is conducted in U.S. dollars.
Options to invest in water include stocks, ETFs, futures, and farmland. Water stocks offer shares in companies involved in the water market. Water ETFs provide portfolios managed by expert firms. Alternative investment platforms enable retail investors to access farmland investments.
What to invest in right now? ›
12 best investments right now
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Money market funds.
- Government bonds.
- Corporate bonds.
- Mutual funds.
- Index funds.
- Exchange-traded funds (ETFs)
Ownership. In the United States, oil and gas rights to a particular parcel may be owned by private individuals, corporations, Indian tribes, or by local, state, or federal governments. Oil and gas rights extend vertically downward from the property line.
Who owns all the oil? ›
If we simplistically look at proven oil reserves, the answer is obvious: mostly OPEC and Russia. According to BP, the global authority on the subject, this collective group of 16 countries owns 1.35 trillion barrels of proven oil reserves, or nearly 80 percent of the world's total.
Can you make a living trading oil? ›
You can make money by trading oil in several ways. The most common is to buy oil when the price is low and sell it when it goes up. You can also make money by selling oil futures contracts. When the price of oil goes down, you make money.
What is the oil price today? ›
Crude Oil & Natural Gas
| Index | Units | Price |
|---|
| CL1:COM WTI Crude Oil (Nymex) | USD/bbl. | 70.04 |
| CO1:COM Brent Crude (ICE) | USD/bbl. | 74.17 |
| CP1:COM Crude Oil (Tokyo) | JPY/kl | 62,090.00 |
| NG1:COM Natural Gas (Nymex) | USD/MMBtu | 2.27 |
Regardless of the type of crude oil being traded, the price is always denominated in US dollars.
How high will oil stocks go? ›
Most oil market analysts believe oil prices are going much higher next year. For example, Jeff Currie, the global head of commodities for venerable investment bank Goldman Sachs, has a $110 forecast for Brent oil (the global benchmark price) in 2023.
What happens when oil stocks go up? ›
An increase in oil prices usually lowers the expected rate of economic growth and increases inflation expectations over shorter horizons. Decreasing economic growth prospects, in turn, lower companies' earnings expectations, resulting in a dampening effect on stock prices.
Will oil prices go up in 2025? ›
The company sees Brent crude oil averaging $95 per barrel in 2023, $88 per barrel in both 2024 and 2025, and $85 per barrel in both 2026 and 2027, according to the oil price outlook report.
In 2021, about 71% of total U.S. crude oil production came from five states.
- The top five crude oil-producing states and their percentage shares of total U.S. crude oil production in 2021 were:
- Texas42.4%
- New Mexico11.1%
- North Dakota9.9%
- Alaska3.9%
- Colorado3.7%
In 1882, Standard Oil Trust created a network of Standard Oil companies throughout the country, led by a board of trustees, where Rockefeller owned over one third of the certificates. By the late 1880s, Standard Oil controlled 90% of American refineries.
What is the #1 oil company in the USA? ›
ExxonMobil is the largest United States-based oil and gas producing company. As of June 2022, ExxonMobil's revenues amounted to nearly 307 billion U.S. dollars.
Why not to invest in oil and gas? ›
Investing in the oil and gas industry carries a number of significant risks. Three of those risks are commodity price volatility risk, cutting of dividend payments for those companies that pay them, and the possibility of an oil spill or another accident during the production of oil or natural gas.
Why are oil stocks losing money? ›
Weak economic data combined with rising central bank interest rates caused oil prices to slump in the second half of this week. Recession fears are rising, and investors worry that a recession will curb demand for oil, hurting prices -- and profits.
Is it smart to invest in gold? ›
Gold is often considered a good investment for diversification, as it may be less correlated with other assets such as stocks or bonds. This means that the price of gold may be less affected by movements in other asset classes, which can help to reduce overall portfolio risk.
Can I invest in to barrels of oil? ›
There are many ways that you can invest in oil commodities. You can even buy actual oil by the barrel. Crude oil trades on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodities exchanges around the world.
How to start oil trading? ›
How to trade crude oil online
- Decide between spread betting or CFDs. Open a live account to start trading oil straight away. ...
- Familiarise yourself with our platform. ...
- Choose your preferred asset. ...
- Research the oil market. ...
- Build a thorough and effective trading strategy.
Both the NYMEX and ICE have electronic access, so anyone who has a brokerage account with a futures broker can trade in oil futures using an electronic trading platform.
Has oil ever hit $100 a barrel? ›
Forget the futures market, the world's most important oil price just smashed through $100 a barrel with every sign it is going to push higher.
Oil at $200 per barrel would certainly be inflationary, but it would also have a detrimental impact on economic growth, potentially driving the global economy into stagflation.
Will crude oil hit $100 a barrel? ›
He noted that India and China were likely to see a pickup in economic growth. However, the significant oil output cut will lead to a rise in Brent oil close to $90 a barrel in the next few months and it could breach the $100 mark by 2023-end.
How much does 1 oil well make? ›
Oil drilling is one of the most important components of an oil field. A single well might produce from 10,000 to 12,000 barrels of oil per day.
Is it a good time to invest in oil wells? ›
Crude prices could remain muted in the near term due to continued macroeconomic uncertainty and some supply and demand dynamics. However, oil appears poised to rebound later this year. This means now might be the perfect time to buy oil stocks, since many have followed oil prices lower in recent months.
How much do oil well owners make? ›
While ZipRecruiter is seeing annual salaries as high as $392,000 and as low as $29,000, the majority of Crude Oil Owner Operator salaries currently range between $147,000 (25th percentile) to $366,000 (75th percentile) with top earners (90th percentile) making $386,000 annually across the United States.
When should I buy oil stocks? ›
It's generally better to buy oil stocks when oil prices are low and expected to rise rather than when they are already high. However, the price of oil affects different types of oil stocks in different ways. Checking out the recent price of oil is a critical first step in oil investing.
Can I trade futures with $100? ›
To fund your futures trading account, you can start with as little as $100 USD.
