Oil plays a crucial role in modern society as one of the most strategic commodities. Despite the rise of green energy, the demand for oil is expected to remain strong for the foreseeable future, providing a stable foundation for its price. This makes oil a popular investment choice for many, offering both safe-haven potential and a way to hedge against market volatility.
Investing in oil can be done in various ways, from direct methods to more indirect approaches. Here are five different ways to invest in oil:
5 ways to invest in oil
1. Oil ETFs
Oil exchange-traded funds (ETFs) offer a simple way to invest in oil without directly owning the commodity. These funds track the performance of oil futures and options contracts, providing investors with exposure to the price movements of oil. Popular oil ETFs include United States Oil Fund (USO), Invesco DB Oil Fund (DBO), and ProShares K-1 Free Crude Oil Strategy ETF (OILK).
Risks: Oil ETFs can be volatile and may not perfectly track the price of oil due to their investment structure.
2. Oil futures
Investing in oil futures allows traders to speculate on the future price of oil. Futures contracts require traders to agree to purchase oil at a specified price in the future, offering the potential for significant returns but also high risks due to leverage and market volatility.
Risks: Futures trading can be highly risky and is best suited for experienced traders.
3. Oil stocks
Owning shares of oil exploration and production companies provides investors with exposure to the oil industry. These companies can benefit from both rising oil prices and increased production, offering a diversified way to invest in oil.
Risks: Investing in individual oil stocks requires careful research and can be volatile.
4. Oil stock ETFs
Oil stock ETFs provide investors with exposure to a diversified portfolio of oil companies, reducing risk and offering potential upside when oil prices rise. Popular oil stock ETFs include Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (VDE), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Risks: ETFs may not fully protect against industry-wide challenges.
5. Oil stock mutual funds
Oil stock mutual funds offer a diversified investment option for those looking to invest in a broad range of oil companies. Funds like Vanguard Energy Fund (VGENX) and Fidelity Select Energy Portfolio (FSENX) provide exposure to oil producers and related industries.
Risks: Mutual funds may contain non-oil related companies and may not fully protect against industry-wide risks.
What makes oil an attractive investment for many investors
Oil’s strategic importance, strong demand, long-term price trend, volatility, defensive store of value, and hedging potential make it an attractive investment choice for many investors.
Bottom line
Investors have multiple options for investing in oil, each offering different levels of risk and potential returns. Whether through ETFs, futures, individual stocks, or mutual funds, investing in oil can provide opportunities for both short-term traders and long-term investors.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Past performance is not indicative of future results.