Summary
- Oil has the potential to produce high returns and diversify your portfolio, but it’s not without risk.
- Ways to invest in oil include oil futures, oil companies, oil ETFs, oil drilling, and more.
- Some oil investments aren’t very liquid and experience high volatility.
- Unbiased can connect you to an advisor to help evaluate all your investing options.
Ways to invest in oil
There are many ways to invest in oil, including stocks, royalty trusts, MLPs, ETFs, mutual funds, futures, options, and direct ownership.
How to invest in oil companies
Investing in oil companies is one of the easiest ways to gain exposure to the oil and gas industry. You can do this through oil stocks, royalty trusts, direct ownership, and ownership of other related businesses.
- Oil stocks: Invest in oil by owning shares of companies in the energy industry involving the exploration, drilling, refining, and sale of oil.
- Royalty trusts: Royalty trusts own mines, oil fields, wells, and generate income from the production.
- MLPs and midstream companies: Ownership may come in the form of master limited partnerships (MLPs), which are publicly traded partnerships of companies that transport, store, refine, and process oil.
- Direct ownership: You may find opportunities to invest directly in oil and gas mineral rights. This avenue can offer greater rewards, but also holds greater risk.
How to: Buy stocks and trust interests through your brokerage account. Buy direct ownership interests through a specialty broker.
How to invest in oil ETFs and mutual funds
Oil ETFs and mutual funds are made up of various oil, gas, and mineral investments. Buying an ETF or mutual fund diversifies your oil investments with one investment. You don’t have to choose stocks or manage the investment because a fund will do that for you.
How to: Buy ETFs or mutual funds in your brokerage account.
How to invest in oil futures
Oil futures are contracts that allow you to trade on the price of oil. Futures create an obligation for both the buyer and the seller to sell at the agreed-upon price at or before the contract date. They’re traded on an exchange to standardize contract terms.
How to: You can apply to trade futures and commodities with a specialized broker.
How to invest in oil drilling
Direct participation programs (DPP) allow investors to directly invest in oil and gas drilling programs. It’s typically structured as a partnership and not available to buy on an exchange.
The types of investments are highly dependent on oil and gas prices, the success of operations, and regulatory and market changes.
How to invest: Typically, only available to accredited investors through specialized brokers.
Related: How to invest in gold?
What are the pros and cons of investing in oil
The pros and cons of investing in oil include the following.
Pros of investing in oil
- High return potential: Oil is a critical commodity in the global economy, and periods of heightened demand can produce higher returns.
- Diversify your portfolio: Oil is an investment that doesn’t move with the market, which can help diversify your portfolio.
- Income: Some oil investments pay regular income as production or prices increase.
- Tax deductions and efficiency: Some oil investments have tax deductions and efficiencies. For example, many costs from oil drilling can be deducted in the first year.
Cons of investing in oil
- Price volatility: Commodity prices, including oil, experience volatility and price swings.
- Regulatory and environmental pressures: Factors outside your control, such as new laws or environmental protections, may influence your investment.
- Long time horizon: It may take years before you see income from oil investments.
- Illiquidity: Some oil investments aren’t easy to sell, and can lock your money up for long periods of time.
- Unproductive wells: It’s possible that direct investments in oil wells may experience a “dry hole” and not produce oil any longer.
Is it worth investing in oil?
Investing in oil comes down to your personal circumstances. Consider your risk tolerance, time horizon, and personal preference when deciding whether to invest in oil. You have more options than you think, but you may want to hold off if you’re not already maximizing your retirement investment vehicles.
The bottom line
It’s helpful to add the expertise of a financial advisor in the mix. They’ll understand the history and significance of oil investments. Get matched with a financial advisor from Unbiased today and take a look at whether or not oil deserves a place in your portfolio.