Investing in a commodity like oil can involve added investment risk, with the possibility of prices slipping all over the place due to volatility caused by supply and demand along with wider geographical and political challenges.
For those who are willing to wade through the risks, there is the potential to invest in commodities like oil without needing to become an oil tycoon. Typically, there are 4 main options for investing in oil, which we’re going to explore, along with important factors to consider and details around the world’s biggest oil stocks.
Like all commodities, there are several different ways that you can invest in oil, but these are suited to different types of investors. For example, options and futures aren’t suitable for beginner investors, who might prefer to invest in stocks or exchange-traded funds (ETFs).
A simple way to invest in oil is through buying oil stocks such as ExxonMobil (XOM) or Chevron (CHV). Generally speaking, as the cost of oil changes, this can impact the share price of these companies – although this isn’t guaranteed and depends on plenty of additional factors.
Developing an understanding of the energy cycle, the landscape in the industry and the impact of price fluctuations will help you determine valuable oil-related assets.
Exxon Mobil is an American oil and gas company. It’s a component of the S&P500 and is one of the world’s largest publicly traded companies and market capitalisation.
Exxon Mobil produces around 5.4 million barrels of oil equivalent every day. It has 21 global oil refineries.
Chevron Corporation is an American energy corporation. It’s a successor company of Standard Oil and is now one of the largest companies in the world, making it onto the S&P500 index.
BP is a British oil and gas company. It’s one of the original “supermajors”, which aren’t to be confused with superheroes, but instead are the 7 largest oil and gas dinosaurs.
BP deals with exploration, extraction, refining, distribution, marketing, power generation and trading. It operates in 61 countries and produces around 2.3 million barrels of oil equivalent every day.
Investing in ETFs is another option worth considering. Oil ETFs can provide access to a whole basket of stocks, without having to pick individual companies yourself. The process is pretty much the same as buying stocks, but instead, you’re buying an oil fund, which typically tracks the performance of a collection of oil-related stocks.
Purchasing commodity-based oil ETFs is an indirect method of owning oil. ETFs can be purchased and sold in the same way as stocks. A key benefit of using an ETF is that they can give you some instant diversification, spreading your risk around multiple oil stocks.
There are loads of oil-based ETFs to select from, covering a whole host of different companies within the industry. Oil ETFs can be a good choice for those who are new to investing, as well as those looking for a simple and diverse way to invest in oil.
Oil futures are a type of derivative contract where you make a deal to purchase oil at a future date at a specified price.
Futures are extremely volatile and riskier than other investment options. You have to be right on the timing and price movement. For example, Brent crude prices surged above $90 a barrel in April 2024 with the outbreak of conflict between Iran and Israel, before dropping back near $80 just one month later as tensions in the Middle East eased and US stockpiles unexpectedly increased.
Primarily existing in the gas and oil industry, A Master Limited Partnership (MLP) is a tax-advantaged corporate structure. It combines the tax benefits of a partnership – profits are taxed only when investors actually receive distributions – with the liquidity of a public company.
Typically, these companies own pipelines that carry the commodity from one place to another.
Risks to MLPs could come from a slowdown in energy demand, environmental hazards, commodity price fluctuations, and tax law reform.
If you want to invest in oil, it’s worth knowing what’s happened to its price in the past and the reasons why. This isn’t an indication of future movements, but it does give insight into what affects the price of oil.
In 2024, oil markets have been marked by volatility similar to previous years. For instance, oil prices experienced serious choppiness due to unexpected changes in US production levels and economic signals from China.
Early in the year, US crude oil production took an unexpected slide downwards, causing temporary price spikes. Meanwhile, China’s lethargic economic recovery post-COVID-19 hast put a serious downer on the global demand picture, depressing prices still further.
At the same time, OPEC+ has struggled to boost oil prices because the US, Brazil, and Guyana have consistently filled the supply gap by increasing their production, undermining the cartel’s efforts to restrict supply.
This is the kind of topic that could easily spark a heated debate at the Christmas dinner table. The most extreme activists, like Greta Thunberg and Extinction Rebellion evangelists, argue that fossil fuels should be outlawed by the end of the decade.
Yet despite the push for renewable energy, with close to $700 billion being invested in these cleaner technologies each year, global demand for oil reached record levels in 2023 and is expected to be even higher in 2024. Some analysts predict we might not see peak oil demand until 2040, a stark contrast to the more optimistic forecasts suggesting it could arrive this decade.
The transition to renewable energy is far from straightforward. If you think it’s tricky installing enough electric charging points at your local Aldi, imagine the challenges of managing this transition in a country like the Congo, where coal and firewood are still the dominant energy sources.
Moreover, the world’s population now stands at eight billion, with 85% living in developing countries. These populations have every right to aspire to the living standards of the developed world, which will require a significant increase in energy consumption.
For these reasons, many believe that oil will continue to play a vital role in meeting global energy demands for the foreseeable future, and thus could remain a strong investment opportunity.
"The Middle East, which holds around 57% of the world’s proven oil reserves, is a crucial region for global oil supply. Historically, tensions and conflicts in the Middle East, such as the recent escalation between Israel and Iran involving drone and missile strikes, have led to volatility in oil prices.
Of particular concern is the impact this could have on the Strait of Hormuz, a crucial chokepoint through which one-quarter of the world’s maritime oil trade passes. Any disruption in this region could cause an oil supply shock, sending the price skyward.
However, while conflict can drive prices up, other factors like increased US oil production and a slowing Chinese economy can counterbalance these effects, leading to potential price stabilisation."
While long-term investments in oil companies can be highly profitable, investors should understand the risk factors before making investments in the sector. These risks include:
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Oil is a pretty (ugly) volatile commodity – it’s on a totally different wavelength to standard stocks and shares. The price of oil is dependent on supply and demand, which is to say, how much is available and how much people actually want.
Investing in oil is quite a nuanced field. You can just look to invest in the biggest oil stocks, or refine your portfolio with an oil ETF. Experienced investors may even want to look at trading oil derivatives. Whatever way you decide to move, remember there are some unique risks involved in investing in oil that you should make sure you are aware of before you invest.
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