Fitri has over 20 years of experience in financial journalism. She has contributed to various international media outlets, including Dow Jones Newswires, Bloomberg, and Reuters,…
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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.
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.
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
Pros
Direct ownership
Tangible asset
Inflation hedge
Control over asset
Cons
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
Pros
High potential returns
Leverage opportunities
Liquidity
Hedging against price movements
Access to global markets
Speculative opportunities
Cons
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 theright, 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
Pros
Limited risk (premium paid)
Potential for high returns
Flexibility (buy/sell rights)
Hedging opportunities
Leverage
Diversification
Cons
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
Pros
Potential for dividends
Ownership in established companies
Diversification within oil sector
Liquidity
Long-term growth potential
Inflation hedge
Cons
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
Pros
Diversification
Liquidity
Lower capital requirement
Easy to trade
Access to various markets
Transparent pricing
Cons
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
Pros
Leverage opportunities
No need for physical ownership
Ability to go long or short
Low initial capital required
Access to global markets
Flexibility and liquidity
Cons
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.
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:
Moving Average (MA)Relative Strength Index (RSI)
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.
Summer DemandWinter Demand
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
Is it a good idea to invest in oil?
Oil is not just a commodity; it plays a crucial role in driving economic growth as a primary energy source for transportation and power generation. This essential role makes oil attractive to investors. However, it also makes oil more volatile than other commodities or securities, such as stocks and bonds.
Investing in oil can be a good idea if you have in-depth knowledge of the oil markets, where prices can swing dramatically within seconds. Thorough research and a clear understanding of market dynamics are essential before making an investment in oil.
Is it profitable to invest in oil?
Investing in oil can be profitable, but it comes with high risks. Potential profitability stems from oil’s essential role in the global economy and its price volatility, which can lead to significant gains during periods of rising prices.
However, this same volatility can result in substantial losses.
How can I invest in crude oil?
Technically, you can buy physical crude oil, but it requires a sizeable storage facility, which involves considerable capital that may not be feasible for retail investors. You can still gain exposure to oil by buying ETFs, stocks of oil companies, or trading futures contracts, all at a fraction of the cost of purchasing physical crude oil.
How to invest in oil with little money?
To invest in oil with little money, consider buying shares of oil ETFs or stocks of oil companies, which allow you to invest with smaller amounts compared to buying physical oil or futures contracts. Another option is to trade oil-related CFDs, which require only a small margin deposit.
Is it a good time to buy oil stocks?
Buying oil stocks requires significant consideration, not only of whether it’s the right time to buy the stock but also of how the oil companies will perform in the future. More importantly, you must consider whether it aligns with your investment goals and risk appetite.
Carefully weighing these factors will help you decide if it’s a good time to invest in oil stocks based on your individual circumstances.
What is the best stock to buy for oil?
Some well-known oil stocks include Exxon Mobil (XOM), Chevron (CVX), Shell (SHEL), BP (BP), and TotalEnergies (TTE). However, determining the best oil stock to invest in can be challenging.
Investing in oil stocks requires a comprehensive analysis of several factors beyond just tracking oil prices. Investors must consider the company’s fundamentals, including financial performance, operational activities, and corporate actions.
How to invest in an oil ETF?
To invest in an oil ETF, start by selecting a brokerage account that offers access to ETFs. Once your account is set up, research and choose an oil ETF that aligns with your investment goals, such as the United States Oil Fund (USO) or ProShares Ultra Bloomberg Crude Oil (UCO), then purchase shares through your brokerage platform just as you would with any other stock.
Which oil ETF is the best?
There isn’t a single best oil ETF, as each has its underlying assets and potential returns for investors. Investors can choose ETFs that suit their investment portfolios by reviewing their return history, constituents, and liquidity. The United States Oil Fund LP (USO) and ProShares Ultra Bloomberg Crude Oil (UCO) are two of the largest crude oil ETFs based on the value of assets under management (AUM).
Is it safe to invest in oil?
Investing in oil comes with both rewards and risks. While oil can provide substantial returns and portfolio diversification, it’s also subject to significant price swings and regulatory changes. Oil prices are highly volatile due to geopolitical events, supply and demand fluctuations, and economic conditions.
As with any investment, it’s crucial to thoroughly research and understand the market and consider your risk tolerance before making a decision.
Is oil a high-risk investment?
Yes, oil is considered a high-risk investment. Its prices are highly volatile, influenced by geopolitical events, supply and demand fluctuations, economic conditions, and regulatory changes. While investing in oil can offer substantial returns, the significant price swings and market uncertainties make it a high-risk investment.
Techopedia’s editorial policy is centered on delivering thoroughly researched, accurate, and unbiased content. We uphold strict sourcing standards, and each page undergoes diligent review by our team of top technology experts and seasoned editors. This process ensures the integrity, relevance, and value of our content for our readers.
Fitri has over 20 years of experience in financial journalism. She has contributed to various international media outlets, including Dow Jones Newswires, Bloomberg, and Reuters, before joining Techopedia. She spent the first 15 years of her career covering commodity and energy news, later transitioning to general financial writing. These days, she conducts interviews with industry players and analysts and reports on international conferences. Fitri holds a degree in International Relations, supporting her expertise in financial journalism. She occasionally serves as a guest trainer for journalistic training and as a moderator for panel discussions.
We uphold a strict editorial policy that focuses on factual accuracy, relevance, and impartiality. Our content, created by leading industry experts, is reviewed by a team of seasoned editors to ensure compliance with the highest standards in reporting and publishing.
Disclosure
When you buy through affiliate links in our content, we may earn a commission at no extra cost to you. Learn how our funding model works. By using this website you agree to our terms and conditions and privacy policy.
When you buy through affiliate links in our content, we may earn a commission at no extra cost to you. Learn 
