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Oil is a volatile commodity, but it can provide an opportunity for investors, especially in today's market. But investing in oil doesn't mean you need to stock your backyard with barrels of the stuff.
Instead, there are 4 main ways to invest in oil in Australia: buy oil stocks, invest in oil ETFs, trade oil futures and invest in MLPs.
Why invest in oil?
Despite the world slowly moving away from fossil fuels, the oil industry still remains relatively attractive for investors.
Like most commodities, the price of oil fluctuates a lot. When the price of oil is high, commodities can provide a strong return on investment from both asset appreciation and strong dividend returns.
At the same time, during times when the commodity price is low, it lags behind the market.
The price of oil is generally at its most attractive during periods of economic growth, although timing the market is incredibly difficult for even the most experienced investor.
Invest in oil company stocks
A simple way to invest in oil is through oil company stocks such as BHP (BHP), Woodside Petroleum (WPL) or Oil Search (OSH). As the cost of oil changes, so will the value of these companies – although this isn't guaranteed and depends on numerous other factors.
Developing an understanding of the energy cycle, the landscape in the industry and the impact of price fluctuations will help you determine valuable oil-related assets.
Accessing the market this way is simple because shares can be purchased with an online broker or financial advisor.
You can pick and choose a range of stocks and cash out when you want.
It's a simple, accessible and versatile way to access the market.
Oil stocks are volatile, which means there's an opportunity to make high profits.
Many oil stocks are well established in Australia and pay dividends.
Cons
Large businesses are involved in things such as refining, which don't actually benefit from higher oil prices, so oil company stocks might not profit from rising oil prices.
Oil stocks are regarded as being more volatile than other sectors, which means that they're high risk.
Exchange-traded funds (ETFs) give access to a whole load of assets, without having to put all of your money into individual firms. The process is pretty much the same as buying stocks, but instead, you're buying an oil "ETF", which typically tracks the performance of oil stocks or the price of oil itself.
Commodity-based oil ETFs allows you to track and profit from the price of oil while industry-sector ETFs allow you to track the stock price of oil companies.
ETFs can be purchased and sold in a manner similar to stocks; however, they can allow investors to reduce risk by investing in the broader sector, rather than individual companies. If you need to brush up on ETFs, check out our guide on ETFs.
In Australia, we have just one ETF that tracks the price of oil (OOO), but we do have several resources and commodity sector ETFs that are exposed to oil.
ASX oil and resources ETFs:
BetaShares Crude Oil Index ETF-Currency Hedged, Synthetic (OOO)
BetaShares Global Energy Companies ETF - Currency Hedged (FUEL)
VanEck Vectors Australian Resources ETF (MVR)
SPDR S&P/ASX 200 Resource Fund (OZR)
BetaShares S&P/ASX 200 Resources Sector ETF (QRE)
Pros
ETFs allow for instant diversification across the oil industry at a low price.
ETFs have a better track record of providing safe, more reliable growth.
You will get pretty close to the average return for the sector, especially if you choose an ETF with a lot of oil companies.
Cons
By placing your money in an ETF, you relinquish some control over the split of assets.
Assets within the ETF could be a lag on your returns.
The futures market allows you to speculate on future oil prices through derivatives contracts. With the traditional method of futures trading, you buy a contract to purchase physical oil at a future date at a specified price, which you can in turn sell. This allows you to profit from oil price fluctuations.
In Australia, futures are more often traded through a commodities CFD broker where you never actually trade physical oil. Instead, you're trading a contract that you make a profit or loss on depending on the price change of the underlying asset. This means you can profit from oil CFDs regardless of whether prices are rising or falling.
Futures and CFDs are extremely volatile and riskier than other investment options. Because they use leverage, both profits and losses are magnified, so it's best suited to more experienced traders.
The 2 most widely traded oil markets in the world are West Texas Intermediate futures (US benchmark) and Brent crude futures (global benchmark).
Pros
Oil futures are among the most actively traded future on the market and hence among the most liquid.
Cons
All futures are volatile investments and oil is no exception. No one can predict with any degree of certainty how the price of oil will fluctuate.
Futures expire on a certain date. If you fail to exercise them prior to expiry, they become worthless.
Primarily existing in the gas and oil industry, a Master Limited Partnership (MLP) is a tax-advantaged corporate structure. It combines the tax benefits of a partnership – profits are taxed only when investors actually receive distributions – with the liquidity of a public company.
Typically, these companies own the pipelines that carry the commodity from one place to another.
Risks to MLPs could come from a slowdown in energy demand, environmental hazards, commodity price fluctuations and tax law reform.
Pros
Companies can offer a very attractive dividend payment.
MLPs can easily be purchased through financial advisors or online brokers.
Cons
MLPs are subject to general market risk and low energy demand.
Stock prices don’t necessarily move in lock step with the price of oil.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
What are the risks of investing in oil?
While long-term investments in oil companies can be highly profitable, investors should understand the risk factors before making investments in the sector. These risks include the following:
Price volatility: Large price fluctuations can occur daily due to unpredictable influences such as supply and demand.
Dividend cuts: If a company is unable to earn enough revenue to fund payments to investors, dividends can be cut.
Oil spill risk: Accidents such as oil spills can cause a company's share price to drop significantly. In 2010, BP saw a decline of over 55% to their stock in the wake of the Deepwater Horizon oil spill.
Frequently asked questions
This price is constantly changing, but you can check the current price as well as recent market trends by searching on Google.
Yes. As with any investment, there are financial risks involved.
Yes. However, having a limited portfolio lacking in diversity can increase your risk.
The United States Oil Fund is an exchange-traded commodity product (ETP) offered by United States Commodity Funds, a US company specialising in managing exchange-traded commodity funds (ETFs).
Important information: Powered by Finder.com.au. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Charlie Barton is a publisher at Finder. He specialises in banking and investments products. Charlie has a first-class degree from the London School of Economics, and in his spare time enjoys long walks on the beach.
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