Testing the Waters of Liquid Gold: How to Invest in Oil

Investing in oil could be as exciting as it is risky. Golden Dayz/Shutterstock

Cold weather and subzero temperatures sweeping across the United States and Europe are expected to boost demand for heating oil, which could squeeze supply and raise prices for this sought-after commodity.

But regardless of weather, oil is nearly always in demand. It’s the main driver of transportation and movement of raw materials across the globe. Oil helps food get from the ground or the farm to your table, among other things.

So you may be wondering how to invest in oil. Well, you don’t need to stockpile barrels of oil in your basement. You can benefit from price movements in the oil markets in a variety of other ways.

But it could help to proceed with caution, because oil is a highly volatile commodity. To get started, then, here are some of the ways you can begin exploring oil investing.

Oil Stocks

These are stocks of companies involved in the exploration, extraction, and production of oil and natural gas. And some of these companies pay dividends.

Some of the top oil stocks today include Comstock Resources Inc., PrimeEnergy Resources Corp., NextDecade Corp., Antero Resources Corp., and U.S. Energy Corp.

But oil stocks are not one-size-fits-all. Just as when evaluating any other stock, you need to carefully analyze oil stocks.

Research these companies and explore factors such as their revenue, profits, debts, price-to-earnings ratios, and more. You can also explore their share prices over time.

But if you’re not too into fundamental and technical analysis, you can invest in baskets of oil stocks.

Oil Mutual Funds and ETFs

Oil mutual funds and exchange-traded funds (ETFs) invest in a variety of oil stocks. This gives you instant diversification. And these funds are professionally managed. So it could be a good way to avoid analyzing specific oil stocks and betting on the ones you think would be profitable.

Mutual funds and ETFs work similarly. But the price of an ETF can change throughout the trading day. The price of a mutual fund is based on net asset value set once a day when markets close.

But when you invest in oil ETFs or mutual funds, you could run the risk of losing big when the oil market tanks as it did during the onset of the COVID-19 pandemic.

Still, you can mitigate risk and add another layer of diversification by investing in broader energy sector ETFs and mutual funds. But it’s important to do your research here, too.

Some of the top oil and energy sector mutual funds and ETFs today include Vanguard Energy Fund Investor Shares, Fidelity Select Energy Portfolio, BlackRock Natural Resources Trust Fund, ProShares K-1 Free Crude Oil ETF, and Invesco DB Oil Fund.

Oil Futures

Oil futures are contracts that allow two parties to exchange a certain amount of oil at a targeted price at a specific date. It’s known as a derivative, which means these contracts derive their value from the underlying price of oil. You don’t actually own the oil here.

But futures contracts, especially ones tied to something as volatile as oil, are meant for advanced and experienced investors.

Risks of Investing in Oil

You may not think it, but oil plays a role in nearly every aspect of our lives. It goes far beyond just powering your car or heating your home. Products made from oil or petroleum include plastics, kerosene, cosmetics, and even aspirin.

Oil is one of the most heavily traded commodities in the world and is vital for entire societies. But it can be extremely volatile and open to numerous risks including geopolitical tension.

For instance, the war between Russia and Ukraine put the oil market in a chokehold. Russia is one of the world’s biggest oil exporters. And the potential threat to oil-producing infrastructure as well as sanctions imposed by governments raised concerns over the Kremlin’s oil supply and caused prices to rise. Uncertainty also remains as analysts speculate the relations between the incoming Trump administration and the world’s largest oil-producing countries. However, President-elect Donald Trump has been openly vocal about supporting domestic energy production and the oil and gas sector. His stance on deregulation and lowering corporate taxes could deliver a boost to energy production and other sectors.

So investing in oil could be as exciting as it is risky. This is why many financial advisers recommend that novice investors begin testing the waters of the oil markets through ETFs or mutual funds tracking the oil or greater energy sector as part of a more broadly diversified investment strategy.

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