WTI (West Texas Intermediate) and Brent crude are the two primary global oil benchmarks with distinct characteristics. WTI is lighter and sweeter (lower sulfur), primarily traded in North America through NYMEX futures. Brent is the international benchmark, traded on ICE, representing approximately two-thirds of global oil contracts. They typically maintain a price differential (spread) based on quality differences, transportation costs, and regional supply-demand balances. Investors can trade both benchmarks through various instruments, with Brent often exhibiting slightly lower volatility than WTI.
- There are also differences in terms of where oil is produced for sale.
- The issuer will very likely use crude oil futures contracts to offset its exposure, but the ETN itself holds no assets.
- As the spot price of oil fluctuates, the price of the ETF will tend to mimic these changes, though imperfectly due to how the fund invests in oil.
- Another way to invest in oil is to own the businesses that produce it, and oil exploration and production (E&P) companies can offer you multiple ways to win when oil rises.
- These funds are essentially baskets of stocks that you buy all at once.
Oil and gas producers might also use volumetric production payments (VPPs) to increase cash flow and fund pre-exports. VPPs allow the owner to maintain ownership while monetizing their field or proven orders. The average mutual fund fee is around 0.4%, but some funds charge over 1%, according to the Investment Company Institute. That might not sound like much, but over time, even small fees can compound into thousands of dollars lost. Most people invest through workplace plans like a 401(k), contributing automatically every paycheck. It’s a strategy known as dollar-cost averaging, where you invest consistent amounts over time, regardless of what the market is doing.
Two of the largest funds here include the Vanguard Energy Fund (VGENX), with an expense ratio of 0.44 percent, and Fidelity Select Energy Portfolio (FSENX), with an expense ratio of 0.65 percent. These funds have heavy exposure to oil producers but also contain other businesses that have less upside if oil rises, as well as other related companies like coal or solar producers. The offers that appear on this site are from companies that compensate us.
Strategic Risk Management for Oil Investors
That means oil prices must move further to rebalance markets in the wake of disruptions such as a drop in demand caused by a pandemic or an interruption of supply stemming from war or economic sanctions. In the spring of 2020, oil prices collapsed amid the economic slowdown. OPEC and its allies agreed to historic production cuts to stabilize prices, but they dropped to 20-year lows.
- Investment in upstream global oil and gas was expected to increase by 11% in 2023; however, upstream investment plans are still 47% lower when compared to 2014.
- Rich Tabaka is the founder of Allied Resource Partners, a Denver-based oil and gas company specializing in tax-advantaged investment opportunities.
- Oil funds, such as exchange-traded funds and index funds, can quickly and easily diversify your portfolio.
- After analyzing seasonal refinery maintenance patterns, Michael identified a recurring price weakness in the shoulder season between winter heating and summer driving demands.
- USO’s investment objective is to provide average daily return within 10% of the average daily return of the front-month contract for West Texas Intermediate crude oil over any 30-day period.
These may be out of reach for many individual investors, but there are several other routes to add oil to your portfolio. Because commodity ETFs frequently suffer from negative roll yield as futures contracts expire, they’re suitable for short-term speculation only. With oil prices at seven-year highs above $100 per barrel in March 2022, the USO’s price was down nearly 90% since launch in 2006 as of March 1, 2022. As of the same date, USO’s sister fund investing in crude oil futures expiring over the next year, the United States 12 Month Oil Fund (USL), was down 31% since inception in 2007. Neither fund has experienced much of an improvement as of July 2024.
Tips on Investing
Oil prices are set globally in a variety of spot and futures markets for crude as well as related products by market participants, including producers, consumers, short-term speculators, and longer-term investors. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Pocket Option: How to Invest in Crude Oil
The iShares Global Energy ETF (IXC) provides exposure to the largest energy companies globally. Exxon and Chevron accounted for about 28% of the $2.1 billion fund’s portfolio in July 2024, followed among top holdings by Shell Plc. (SHEL), TotalEnergies (TTE), ConocoPhillips (COP), BP Plc (BP), and Enbridge Inc. (ENB). Alternatively, you could trade futures with the aid of a full-service broker, typically a commodity trading advisor (CTA). After being extracted from the ground, crude oil is processed and used in many different petroleum products (the term “petroleum” is often used interchangeably with “oil”).
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The journey of how to invest in crude oil requires combining market knowledge, analytical frameworks, appropriate investment vehicles, and disciplined risk management. Whether utilizing ETFs for passive exposure, energy stocks for dividend income, or CFDs for active trading on platforms like Pocket Option, successful oil investors maintain flexibility while adhering to core principles. Derivatives are the best way to gain direct exposure to petroleum prices because you literally agree to buy and sell barrels of oil. However, investors should be extremely cautious with this asset class. Options are sophisticated products that can cost more than they seem, while futures contracts can end up triggering significant losses. For most investors, this is by far the best way to invest in oil.
For example, buying stock in a chemical or plastics manufacturer will expose you to a company likely to do well when oil prices dip. This not only allows you to buy into the market but can be a good counter-cyclical investment to offset any direct investments you have made. The same goes for companies that sell drilling and production services, make and lay pipelines and move the product in ships. Investors have a variety of ways to play the price of oil depending on exactly the kind of upside and downside they want.
One way to minimize losses in investing is through diversification. Rather than betting on a single stock, investors spread their risk. Mutual funds and ETFs are common tools for this, offering exposure to a wide range of assets. One simple way for the average person to invest in oil is through stocks of oil drilling and service companies. In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs. As such, removing subsidies can allow a country to increase oil production, thus increasing supply and lowering prices.
Crude oil trades on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodities exchanges around the world. Futures contracts are agreements to deliver a quantity of a commodity at a fixed price and date in the future. USO’s investment objective is to provide average daily return within 10% of the average daily return of the front-month contract for West Texas Intermediate crude oil over any 30-day period.
NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.