Investors have many options for gaining exposure to oil as an investment. These methods come with varying degrees of risk and range from direct investment in oil as a commodity, to indirect exposure in oil through the ownership of energy-related equities, ETFs or options contracts. Each of these investment types can be acquired through an online brokerage account, or directly through a broker.

Key Takeaways

  • Crude oil is an essential commodity that provides energy and petroleum products to the global market.
  • Investors can speculate on the price of oil directly by trading in oil derivatives or the USO exchange traded product, which tracks the price of WTI crude.
  • Investors can also play the oil markets in a more indirect manner by investing in oil drillers and oil services companies, or ETFs that specialize in these sectors.

Oil as an Asset

Oil is an economically and strategically crucial resource for many nations due to its basis for much of the energy that we consume. Countries like the United States maintain large reserves of crude oil for future use. The measure of these oil reserves acts as an indicator for investors; changes in the stock levels of oil are reflections of trends in production and consumption.

In the Spring of 2020, oil prices collapsed amid the COVID-19 pandemic and economic slowdown. OPEC and its allies agreed to historic production cuts to stabilize prices, but they dropped to 20-year lows.

Oil and gas investors look for specific economic indicators to help them understand future movements in the petroleum industry. Like any commodity market, oil and gas companies, and petroleum futures are sensitive to inventory levels, production, global demand, interest rate policies, and aggregate economic figures such as gross domestic product.

Aside from supply and demand factors, another force driving oil prices has been investors and speculators bidding on oil futures contracts. Many major institutional investors now involved in the oil markets, such as pension and endowment funds, hold commodity-linked investments as part of a long-term asset-allocation strategy. Others, including Wall Street speculators, trade oil futures for very short periods of time to reap quick profits. Some observers attribute wide short-term swings in oil prices to these speculators, while others believe their influence is minimal.

Investing in Oil Directly

One direct method of owning oil is through the purchase of oil futures or oil options. Futures are highly volatile and involve a high degree of risk. Additionally, investing in futures may require the investor to do a lot of homework as well as invest a large amount of capital.

Another direct method of owning oil is through the purchase of commodity-based oil exchange-traded funds (ETFs). ETFs trade on a stock exchange and can be purchased and sold in a manner similar to stocks. For example, buying one share of the U.S. Oil Fund (USO) would give you exposure to roughly one barrel of oil. The fund's investment objective is to provide daily investment results corresponding to the daily percentage changes of the spot price of West Texas Intermediate (WTI) crude oil to be delivered to Cushing, Oklahoma.

Investing in Oil Indirectly

In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs, like the iShares Global Energy Sector Index Fund (IXC), and to energy-sector mutual funds, like the the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk.

Other ETFS that track the oil and gas drilling sector are the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), and the Invesco Dynamic Energy Exploration & Production Portfolio (PXE).

What The Experts Have to Say:

Advisor Insight

Rebecca Dawson
Silber Bennett Financial, Los Angeles, 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.