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You don’t need to move to Texas and buy a well to start investing in oil. You don’t even need a lot of money. Oil-related stocks and mutual funds make it easy for beginners to invest in petroleum related investments — without having to relocate to the Lone Star State.
Oil and petroleum
“Oil” goes beyond what you put in your car, and understanding the oil market is much more complex than waiting to fill your tank until your local gas station’s prices dip. First of all, the stuff that comes out of the ground is called crude oil. After being extracted from the ground, crude oil is processed and used in many different petroleum products (the term “petroleum” is often used interchangeably with “oil”).
Oil and petroleum aren’t just used to power your car. Here are some examples of other products made from oil:
Heating oil (to power boilers and furnaces).
Cosmetics and lotions.
Importance of petroleum supply and demand
Just like any investment, supply and demand play a role in how much oil is worth. For now, our society depends on it for everything from commuting to work to heating homes. But that demand may change in the future. The increase in renewable energy solutions like wind and solar power, the amount of oil available around the world and the conflicts surrounding oil production all play a part in oil’s supply and demand.
Oil is a limited resource, meaning that one day we will run out of it. In the meantime, as that supply dwindles and we still rely so heavily on it, the demand may increase.
How to invest in oil
There are several ways to invest in oil, and most don’t include owning any physical oil yourself. You can invest in oil-related stocks, oil mutual funds and oil futures. To buy or sell oil investments, you’ll need to have a brokerage account.
» Need a hand? Here’s how to open a brokerage account
Here are some of the more common ways to invest in oil.
These are shares of companies involved in the extraction and production of petroleum. You’ll want to research a company thoroughly before buying its stock. Note that it’s generally a good idea for the majority of a portfolio to be invested in mutual or index funds — which we’ll talk about below — rather than individual stocks, due to the diversification that funds provide. Explore how to invest in stocks.
Oil mutual funds
These funds are essentially baskets of stocks that you buy all at once. Oil funds, such as exchange-traded funds and index funds, can quickly and easily diversify your portfolio. However, if you’re investing only in a specific type of fund, such as an oil fund, you won’t be getting nearly the diversification you would if you invested in a broad index fund since the oil fund only invests in oil-related stocks. If the oil industry were to tank, an oil fund may perform worse than a more diversified fund. But if you already have some broad funds in your portfolio, adding an oil ETF or index fund could help further diversify your holdings.
» Want broader exposure? Learn about energy ETFs
Futures are more advanced than investing in oil stocks or funds and should be approached with caution. Futures are a way for a producer to lock in the price of what they are selling in advance — and for the buyer to lock in the price of what they are purchasing. Oil futures are contracts in which two parties agree to exchange a set amount of oil at a set price on a set date. When you trade futures, you’re actually trading the contract itself, not the oil or underlying commodity. If the price of oil rises, the contract may become more valuable and the owner of the contract could sell it for a profit. If it falls, the contract could lose value and, in turn, the owner could lose money when selling.
The idea with futures trading is that you never actually end up with the oil yourself. There is usually a healthy market of buyers who will take a futures contract off your hands. But in spring 2020, when the coronavirus pandemic was starting, the oil futures market collapsed. Oil refineries weren’t buying as much oil, and there ended up being a backlog. Investors trading oil futures couldn’t find anyone to buy their contracts and dropped their prices to entice buyers. In April 2020, oil prices temporarily fell into the negative: The futures contract for West Texas crude oil was minus $37.63 a barrel. In other words, investors were willing to pay to get rid of their contracts. Oil futures have since rebounded, breaking above $50 in December 2020, but that scenario may give investors some pause. If you’re interested in trading futures, proceed with caution.
» Think you can predict the future? See the top picks for online brokers for futures
How much money do I need to invest in oil?
Investing in oil isn’t just for the rich, and it can be fairly affordable. Several well-known oil stocks frequently trade for under $100 a share. ETFs are another inexpensive way to invest in oil. ETFs trade on an exchange and investors can buy individual shares of an ETF, similar to stocks. The median market price of 43 energy ETFs available through Fidelity Investments was about $24 a share as of this writing — a small price tag for exposure to a large collection of energy companies.
Is investing in oil safe?
All investments come with a degree of risk, but some investments are safer than others. Investing in an oil fund is generally considered safer than investing in a single oil stock, because of the diversification offered by a fund, which holds many investments. Investing in oil futures is often considered more risky.
Are there more sustainable investments than oil?
While investing in oil may be enticing for some, other investors may prefer a more sustainable option. Investments are sometimes graded using ESG factors (environmental, social and governance), which can give you an idea of how sustainable a company or investment is. Some ESG investments even have criteria that require them to be free of fossil fuel investments. Learn about ESG investing.