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When you see prices rising or falling at the gas pump, you might wonder how those market shifts are playing out with oil stocks on Wall Street.
Although it’s possible for investors to brave commodities markets and invest in oil directly, buying equities in oil companies can be more approachable for everyday investors, and potentially less risky.
There are several types of oil companies whose stock is publicly traded — each with their own set of potential upsides and drawbacks.
Overall, though, it’s important to remember that oil stocks, like the companies they represent, will likely do better if oil prices are high. And their long-term outlook is deeply enmeshed with geopolitical, economic and regulatory factors beyond any one company’s control.
Michael Jones, a chartered financial analyst based in Virginia, says oil’s recent price increases could make for some intriguing opportunities, but he adds that investors should also consider ongoing technological changes that could reduce demand.
“There’s a huge amount of the oil industry that is devoted to the internal combustion engine,” says Jones, who is chief executive of Caravel Concepts, a maker of asset allocation software for financial advisors. “When you buy into the energy space, you are buying into a gale-force headwind in terms of the long-term industry prospects.”
Best-performing oil stocks
These are the oil stocks in the S&P 500 Index with the best one-year performance.
Performance (1 Year)
Marathon Petroleum Corp
Targa Resources Corp
Baker Hughes Co
Diamondback Energy Inc
Williams Cos Inc
Pioneer Natural Resources Co.
Source: Finviz. This stock data is current as of December 1, 2023 and intended solely for informational purposes.
Oil stocks today
And here's how the S&P 500 oil stocks are doing today. This chart shows the company's daily change, as well as its current price.
Source: Google Finance. Stock data may be delayed, and is intended solely for informational purposes.
» New to the market? Investing tips for beginners
5 types of oil stocks
Most oil stocks fall into one of a few major categories. There are companies that find and pump oil, companies that provide oilfield services, companies that refine oil and integrated companies that do it all. In addition, there are some specialized companies that own and operate oil pipelines.
1. Exploration and production
Companies that look and drill for oil are among the most volatile stocks in the oil space, Jones says, and their prices are very responsive to short-term trends. This can be a benefit if you buy at the right time or if the company you’re investing in makes a significant discovery of natural resources.
But shares in oil producers can also be vulnerable to downturns in the oil market that affect their ability to make a profit on what they pull out of the ground.
2. Oilfield services
These are companies that make equipment used in the massively complex process of drilling and extracting oil. This includes drilling gear, testing and safety tools, and other heavy-duty components.
Oilfield services companies can also see big swings in profitability driven by oil prices. If oil prices go down, drilling becomes less profitable, and producers are less likely to spend money on equipment and services. If the price goes up, producers may spend more on oilfield services as they try to reach reserves that are more difficult to extract.
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Refining companies operate the facilities that turn crude oil into products such as gasoline. These companies can do quite well in favorable market conditions. Since they have to buy oil well in advance of the time they receive, refine and sell it, they can make good returns amid rising prices.
However, when prices go down, that dynamic is reversed. Refiners can wind up charging less for their products than they cost to make.
4. Integrated oil companies
Integrated oil companies have some aspects of production, services and refining all in-house. This can mean that their risks are spread out more broadly than companies that specialize in one aspect of the oil industry.
Nonetheless, their prospects can vary considerably because of the price of oil.
5. Master limited partnerships
Master limited partnerships, or MLPs, are publicly traded companies that own pieces of energy infrastructure such as pipelines. These tend to pay high dividends, Jones says, and they are popular with retail investors. Their prices can be volatile, though.
» Learn more: How to buy stocks
Is it a good idea to invest in oil stocks?
Buying oil stocks isn’t for everyone. Here are some pros and cons of oil stocks.
Dividends: Oil stocks tend to have high yields for their investors. In flush times, companies across the industry will distribute a good proportion of their profits to shareholders, rewarding those who stuck around when times were tougher.
Portfolio balance: The performance of oil stocks and the energy sector as a whole may not correlate with the broader market, meaning holdings in the energy sector could buoy losses from those elsewhere.
Volatility: Oil stocks can swing dramatically along with the market for oil. If you’re buying oil stocks, you should be comfortable with the possibility that your investments will lose value.
Geopolitics: Energy companies operate all around the world, and that means they rely on the sometimes fragile relations between countries where oil is produced, countries that control distribution routes, and countries where consumers live. For example, the Russian invasion of Ukraine has led to upheaval in the oil market. While this has led to higher prices, and some gains for oil companies, it also has the potential to reorient the global energy situation in ways that no one firm can control or even predict.
Environment and regulation: Nations around the world are working to transition away from fossil fuels in the hopes of blunting the effects of climate change. Though this is a slow process, over time it could mean a lot less oil is produced and sold. And in the shorter term, demand for equities in fossil fuel companies could potentially be affected by moves toward sustainable investing, both by individuals and institutions such as pension funds.
» Learn more: Environmental, social and governance investing
Alternatives to oil stocks
Generally speaking, it is relatively risky to buy individual stocks rather than index funds that provide broader exposure to the market. If you believe oil companies will do well but aren’t sure which ones to pick, you could also consider investing in an exchange-traded fund linked to oil.
If you’re looking for more direct exposure to oil, you can consider looking to the commodities market, where there are products such as oil futures for sale. Jones, however, says such investments can be risky for retail investors.
Prices on the futures market represent the beliefs of sophisticated investors who have detailed knowledge of oil discovery, production and shipping.
“They understand these complexities a whole lot better than you do,” Jones says. “If you think you can compete with them, God bless you.”
How to buy oil stocks in 4 steps
If you don’t already work with a stockbroker and you want to buy oil stocks, you’ll need to go through the following steps.
1. Choose a stockbroker
There are several online brokers that can help you buy stock in oil companies. The best one for you will depend on your specific needs. Here are some tips on how to open a brokerage account.
» Ready to get going? Review NerdWallet’s best online stockbrokers
2. Fund your account
Online stockbrokers may allow people to transfer money onto their platforms using bank transfers, ACH transactions, debit cards and credit cards. Before you buy, make sure you check the fees for the type of payment you intend to use.
And note that it can be especially risky to purchase volatile investments using high-interest debt such as credit cards. If your investments decline in value, you’ll still owe interest on the price you paid for them — deepening your losses.
3. Do your research
It’s a good idea to read up on the stocks you want to buy before you dive in. Industry news coverage, analyst reports and company financial statements can help you get more comfortable with your decision.
4. Buy the stock
You should be able to locate the stock you are looking for using its ticker symbol. From there, your broker’s website should be able to walk you through the rest of your purchase.
» See our full guide on how to buy stocks