If you remember the hit TV show “Dallas” from the 1980s, then oil probably brings to mind images of fictitious millionaires like J.R. Ewing sporting ten-gallon cowboy hats and massive steel oil rigs pumping away under the blazing Texas sun.
Today, crude oil (also known as petroleum) has evolved into a dominant 1.7 trillion dollar industry. While most crude oil ultimately becomes gasoline or gas, it’s also found throughout countless industries and commercial products. It’s no wonder they dubbed it “black gold” and “Texas tea.”
As an everyday investor, you obviously can’t back up a truck and load it with petroleum barrels (nor would you want to). However, that doesn’t mean oil can’t serve as a valuable piece of your investment portfolio.
Here’s how to invest in oil without the hassle of physically purchasing it.
Why Invest In Oil?
Make no mistake – oil remains an economically vital resource for the world. Without it, we wouldn’t just lack gas for our vehicles, but countless power plants and factories couldn’t function, and numerous products couldn’t be manufactured.
Oil ranks among the biggest consumables of our species. Even minor shifts in its price can reshape the behavior of the global economy, which is why nations monitor its trading value as closely as they track publicly listed companies.
The Benefits Of Investing In Oil
The primary benefit of oil investing is portfolio diversification. Just as smart asset allocation requires a robust mix of various stock types (large, small, growth, value, etc.), you also need other asset classes like bonds, real estate, precious metals and commodities—which includes grains, gold, beef, natural gas, and naturally, oil.
Building on this point, conventional wisdom suggests that oil and stock prices maintain an inverse relationship. When markets decline, oil prices typically rise, helping you hedge losses during market downturns.
The Risks Of Investing In Oil
A significant downside to oil investing is extreme price volatility. Since oil is a global commodity produced across multiple countries, geopolitical tensions between world leaders frequently create substantial impacts on its trading value.
How To Invest Your Money In Oil
Multiple approaches exist for incorporating oil into your investment portfolio.
Invest In Oil Directly
The simplest method for buying oil exposure without physical ownership is through oil exchange-traded funds (ETFs).
For instance, the United States Oil (USO) Fund ETF tracks daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil. Owning approximately one share of USO roughly equals owning one barrel of oil.
Other popular alternatives include:
Buy Oil Alongside Other Commodities
Since oil belongs to a specialized group of energy-focused commodities, you’ll often discover financial products that bundle them together. These energy-sector ETFs or mutual funds typically combine oil, natural gas, and alternative energy investments.
Popular ETF options include:
Leading mutual fund choices include:
- Vanguard Energy Fund (VGENX)
- Fidelity Select Energy Portfolio (FSENX)
- T. Rowe Price New Era Fund (PRNEX)
Invest In Oil And Gas Company Stocks
Even if direct oil or energy investing doesn’t appeal to you, investing in oil-producing companies can prove beneficial. These mega-corporations possess the financial strength and capital access needed to survive while other economy sectors may struggle.
Additionally, energy company stocks often reward shareholders with dividends. Many deliver yields exceeding 3 to 4 percent compared to other S&P 500 stocks that average only 2.0 percent. At minimum, you’ll receive quarterly payments simply for being a partial owner.
Consider exploring stocks from these established oil/energy companies:
- Exxon Mobil (XOM)
- Chevron (CVX)
- Valero Energy (VLO)
- Occidental Petroleum (OXY)
- ConocoPhillips (COP)
Oil Futures/Options
Similar to stocks, you can invest in oil through futures or options contracts. A futures contract represents an agreement to buy or sell a specific oil quantity on a predetermined future date, while options provide a way to purchase these futures contracts.
Generally, futures and options involve high speculation and considerable risk. Only experienced investors familiar with these securities should consider them.
Master Limited Partnerships
Another indirect oil investment method involves investing in the wells themselves through master limited partnerships (MLPs).
MLPs make you a partner without requiring active business involvement, providing special tax advantages. However, they require unique IRS reporting.
This strategy is somewhat specialized and should be reserved for investors with experience in these asset types.
How To Buy ETFs And Mutual Funds
You can easily purchase any of the ETFs or mutual funds mentioned above through a broker.
Brokers typically fall into two main categories:
- Full-service brokers like Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
If you prefer guidance in selecting appropriate securities or want someone else to handle the process, consider using a robo-advisor instead. Top options include Betterment, Wealthfront, and M1 Finance.
Retirement Funds
Don’t overlook this opportunity—if you want to invest in oil or the energy sector while avoiding taxes on capital gains and dividends for years to come, consider purchasing them through your retirement plans like your IRA (individual retirement account) or 401(k).
