Those watching the oil market and looking for ways to invest in this commodity know that prices have experienced a high level of volatility since soaring past US$140 per barrel in 2008.
One recent curveball came in form of the COVID-19 pandemic, which put oil prices under significant pressure in 2020, even pushing them to an unprecedented negative level at one point. The spread of COVID-19 disrupted global economies and caused a “decline in energy demand without parallel,” pointed out Deloitte in its 2020 mid-year oil and gas industry outlook.
“In an industry used to the highs and lows of economic and commodity price cycles, 2020 pose(d) great challenges to oil and gas companies,” the accounting and consultancy firm stated in the report.
Oil rebounded significantly in 2021 as demand surged on the back of widespread economic recovery. After starting the year off at the US$54 level, prices reached a three year high in October, settling at US$83.65.
Further adding to the momentum, Russia’s invasion of Ukraine in early 2022 set the oil bull market on fast-forward as the resulting sanctions curtailed the movement of supply for one of the world’s largest oil producers. Oil prices surged past US$120 in March 2022, becoming a major driver of an inflationary environment that has led central banks around the world to raise interest rates.
Later in the year, with signs of an economic slowdown and possible recession weighing on demand, prices began sliding to close out the year US$76 level.
In that price environment, many oil producers still managed to rake in ‘record profits in 2022,’ according to Deloitte, ‘providing ample cash flow to fund their strategies in 2023.’ Oil prices have traded in the US$70s range for most of 2023 so far.
Analysts believe demand for oil will not slow any time soon, but remain cautious — although the short-term outlook for the oil market has its challenges, long-term demand is still looking positive.
These circumstances have left many market participants wondering if oil is a good bet. It’s important for all investors to do their own due diligence, but for those ready to jump in, here’s a brief guide on investing in oil.
How to invest in oil futures and ETFs?
Those interested in investing in oil have various options, from direct methods like purchasing oil futures, which are high risk and very volatile, to purchasing lower-risk energy sector exchange-traded funds (ETFs).
Futures trading requires a strong level of skill, and can be difficult for the average investor to understand. But for those in the know, here are some futures contracts offered on the NYMEX: Light Sweet Crude Oil, Brent Crude, E-mini Crude Oil, the Crude Oil Volatility Index (INDEXCBOE:OVX) and RBOB Gasoline.
As mentioned, ETFs are a great way to invest in the oil sector at a lower risk. That’s largely because they allow investors to gain exposure to a diversified portfolio while only having to track a single stock.
Options in the ETF sector are varied, and include the iShares Global Energy Sector ETF (BMV:IXC) and mutual funds like the T. Rowe Price New Era Fund (MUTF:PRNEX). Other oil ETFs available are the United States Oil Fund (ARCA:USO), the United States Brent Oil Fund (ARCA:BNO), the Energy Select Sector SPDR (ARCA:XLE), the United States 12 Month Oil Fund (ARCA:USL), the Invesco DB Oil Fund (ARCA:DBO), the United States Gasoline Fund (ARCA:UGA) and the SPDR S&P Oil & Gas Explore & Product (ARCA:XOP).
How to invest in oil stocks?
Of course, there’s also the option of investing in oil exploration, development and production companies. Again, investors will need to do their own research to determine which stocks meet their criteria.
Dividend-paying stocks are often a popular choice, and US-listed oil stocks offering strong dividends include producers like Diamondback Energy (NASDAQ:FANG), ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Enbridge (NYSE:ENB) and EOG Resources (NYSE:EOG).
Canada is home to its own contingent of dividend-paying oil stocks, with options such as Orca Energy Group (TSXV:ORC.B,OTC Pink:ORXGF), Alvopetro Energy (TSXV:ALV,OTCQX:ALVOF), Peyto Exploration & Development (TSX:PEY,OTC Pink:PEYOF), Suncor Energy (TSX:SU,NYSE:SU) and Topaz Energy (TSX:TPZ,OTC Pink:TPZEF).
Whether you choose publicly traded oil company stocks, investing in oil futures or an ETF strategy, it’s clear there are plenty of ways to invest in the industry.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.