Oil stocks are a popular investment option for those seeking to diversify their portfolio and potentially earn a return on investment. As one of the most important commodities in the world, oil plays a vital role in the global economy, making oil stocks an attractive investment opportunity. However, investing in oil stocks can be complex and requires a thorough understanding of the industry, as well as the various factors that impact stock prices. In this article, we will provide a guide on how to invest in oil stocks, including factors to consider before investing, different types of oil stocks, and ways to improve your comprehension of the oil market. Whether you are a seasoned investor or a beginner, this article will provide valuable insights and tips to help you navigate the world of oil stocks and make informed investment decisions.
How to invest in Oil Stocks: Guide to investing in Oil Markets
Table of Contents
Key Takeaways:
Some investors buy oil stocks due to the global demand in the commodity, high potential for returns, strong dividends, and diversification.
Oft-cited drawbacks to consider when investing in oil stocks include volatility, the geopolitical and environmental risks, and that oil is a capital-intensive industry
Services like Public Premium give you access to advanced data and insights that are helpful when conducting fundamental analysis.
The oil value chain is expansive and includes exploration and production of crude oil, transportation and storage, refining of crude oil into various petroleum products, and distribution and marketing of the final products to end-users.
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What are oil stocks?
Oil stocks are stocks of companies that are involved in the exploration, extraction, refining, and marketing of oil and gas products. These companies can range from large integrated oil companies, which are involved in all aspects of the oil and gas industry, to smaller companies that specialize in specific aspects of the industry, such as drilling or transportation.
Some examples of oil stocks include:
ExxonMobil (XOM): One of the largest integrated oil companies in the world, with operations in exploration, production, refining, and marketing of oil and gas products.
Chevron (CVX): Another large integrated oil company, with operations in exploration, production, refining, and marketing of oil and gas products.
Royal Dutch Shell (RDS.A): A multinational oil and gas company that operates in over 70 countries, with operations in exploration, production, refining, and marketing of oil and gas products.
ConocoPhillips (COP): A large independent exploration and production company, with operations in several countries around the world.
Halliburton (HAL): A large oilfield services company that provides a range of services to the oil and gas industry, including drilling, completion, and production services.
Benefits to consider when buying oil stocks
There are several potential benefits of investing in oil stocks, including:
Potential for returns: Oil stocks have historically shown high potential for returns, making them an attractive investment option for those seeking long-term gains. While there are always risks involved with investing, the demand for oil continues to grow, which can lead to higher stock prices over time.
Diversification: Adding oil stocks to a diversified portfolio can help reduce risk and potentially increase overall returns. Oil stocks tend to have a low correlation with other asset classes meaning they may perform well even when other investments are struggling, though this is not guaranteed.
Steady dividends: Many oil companies (but not all of them) pay dividends to shareholders, providing a steady stream of income. This can be particularly attractive for those seeking passive income from their investments.
Global demand: Oil is a crucial commodity for the global economy, with demand coming from various sections, including transportation, manufacturing, and agriculture. This means that oil companies are typically well-positioned to weather economic downturns and maintain profility.
Potential for growth: As the world transitions to cleaner energy sources, oil companies are diversifying their businesses to include renewables and other clean technologies. This, in turn, could present future growth opportunities for those investing in oil stocks, as these companies work to adapt to an evolving energy landscape
Limitations to consider when buying oil stocks
While there are potential benefits to investing in oil stocks, there are also several oft-cited drawbacks to consider:
Volatility: Oil prices can be highly volatile and subject to sudden fluctuations, which can lead to share declines in stock prices. Factors such as political instability, natural disasters, and changes in global supply and demand can all play a role in driving the price of oil, and, therefore, the value of oil stocks.
Environmental concerns: The oil industry is often associated with environmental issues such as pollution and climate change. As the world shifts towards cleaner energy sources, the demand for oil may decrease, creating competition and potentially impacting the profitability of oil companies.
Regulatory risk: Governments around the world are increasingly cracking down on the oil industry, which can impact the profitability of oil companies. For example, governments may impose taxes, limit drilling rights, or implement environmental regulations that could increase costs for oil companies.
Capital-intensive industry: The oil industry requires significant investment in exploration, drilling and infrastructure. This means that oil companies may endure high debt levels and, in such cases, will need to raise capital through debt or equity offerings potentially diluting the value of existing shares.
Geopolitical risk: The oil industry is heavily influenced by geopolitical factors including conflicts and sanctions. These events can impact the global supply and demand for oil, leading to price fluctuations and potential risks for investors.
Oil stocks: Bull and bear cases
Oil industry bulls, or advocates, point to the benefits of these stocks. More specifically, they cite factors including growing demand, supply constraints, which can lead to high oil prices and improved profitability for oil companies, technological advancements, and yield and dividends fueling income and stability for investors to back their positive look on the industry. Finally, bulls also argue that low valuations witnessed in the recent economic downturn could offer opportunities for investors to buy in at a discount.
Oil industry bears, or naysayers, on the other hand, cite the widespread transition to clean energy and growing environmental concerns as contributing factors to a lack of opportunities for value investors. They also cite technological advancements, including solar and wind power, battery storage and electric cars as viable competitors that could further reduce the demand for oil, and high debt levels causing financial distress to oil companies, particularly during periods of sustained low oil prices and diminished demand.
Where to research oil stocks
There are several resources investors can use to research oil stocks:
Brokerage firms: Some brokerage platforms include advanced charting and insights, including Public Premium, which offers subscribers with exclusive data such as GAAP and non-GAAP metrics per stock, as well as exclusive reports and interviews.
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Financial news websites: Financial news websites such as Bloomberg, Reuters, and CNBC are great resources for researching oil stocks and market news. These websites provide up-to-date news, analysis, and market data on the oil and gas industry, as well as individual oil stocks.
Stock market research websites: There are several stock market research websites that provide information on individual stocks, including oil stocks. Some popular examples include Yahoo Finance, MarketWatch, and Seeking Alpha.
Annual reports: Oil companies are required to file annual reports with the Securities and Exchange Commission (SEC) which provide detailed financial information about the company. These reports are available on the SEC’s website, and they can also be found on the company’s own website.
Industry reports: Industry reports from reputable sources such as the International Energy Agency (IEA) or the US Energy Information Administration (EIA) can provide valuable information on the oil industry as a whole, which can be useful when researching oil stocks and general tips for oil investing.
How to invest in oil stocks and what does it cost
To get started, here are some steps to consider when buying oil stocks:
Research oil companies: When researching and choosing oil stocks to invest in look for companies that have a strong financial track record, a competitive advantage in the market, and a strong management team. You can use online resources like Yahoo Finance, Google Finance and Investopedia to shape your research.
Choose a broker: You’ll need a broker account to buy oil stocks if you don’t already have one. When looking for the right broker, a good starting point is to identify the factors that would most benefit your financial plan including whether the broker offers low fees and commissions, a user-friendly trading platform, like Public, and a variety of investment options.
Place an order: After funding your account, you can place an order to buy oil stocks. You can choose to buy individual stocks or invest in a mutual fund or exchange-traded fund (ETF) that holds a basket of oil or energy stocks. Decide how many shares you want to purchase and at what price.
Monitor your investments: After buying oil stocks, monitor your investments regularly to ensure they are performing as expected and still serve your investment goals. Keep up-to-date with the latest news and events that may affect the oil industry and the companies you have invested in.
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Some examples of ETFs with oil and energy as part of their portfolio include SPDR S&P Oil & Gas Exploration & Production ETF (XOP), iShares U.S. Oil & Gas Exploration & Production ETF (IEO), iShares U.S. Energy ETF (IYE), Vanguard Energy ETF (VDE), Energy Select Sector SPDR Fund (XLE), and United States Oil Fund (USO). Separately, some mutual fund examples to consider include Vanguard Energy Fund, the Fidelity Select Energy Portfolio, and the BlackRock Energy and Resources Fund.
Additionally, investors can trade oil options and futures through a commodities broker or a brokerage account that allows them to trade commodity futures. To trade oil futures, investors can buy or sell futures contracts that specify a certain amount of oil to be delivered at a future date at a set price. To trade oil options, investors can buy or sell options contracts that give the holder the right, but not the obligation, to buy or sell oil futures at a predetermined price and date. However, it’s important to note that trading futures and options is more complicated and risky than traditional stock investing, so it’s important to understand the risks and do thorough research before investing.
Yet another way to invest in oil is through Master Limited Partnerships (MLPs), a type of business structure commonly used by energy companies, particularly those involved in oil and gas exploration, production, and transportation. MLPs are structured as publicly traded partnerships that allow investors to participate in the income generated by the partnership’s assets, without paying corporate income tax. Some risks associated with MLPs include exposure to commodity price fluctuations, changes in government regulations, and fluctuations in interest rates.
The amount of money needed to invest in oil depends on the investment vehicle and the specific investment strategy being employed. For example, to invest in oil stocks, you can buy shares of individual companies, which requires as little as a few hundred dollars, depending on the stock price and the minimum investment requirements of your brokerage account. However, investing in oil futures or options typically requires a large amount of capital because these investments are traded in contracts representing large quantities of oil. Futures contracts, for example, typically have a standard size of 1,000 barrels of oil, implying that even minor price movement can result in a significant gain or loss.
Sustainable alternatives to investing in oil
There are several sustainable alternatives to investing in oil, including:
Renewable energy stocks: Investing in stocks of companies that produce and distribute renewable energy, such as solar, wind, or hydropower, can be a sustainable alternative to investing in oil.
Green bonds: These are fixed-income securities issued to finance environmentally sustainable projects, such as renewable energy projects.
Impact investing funds: These funds invest in companies that have a positive social or environmental impact, such as those that promote clean energy and sustainable practices.
Socially responsible mutual funds: These funds invest in companies that meet certain environmental, social, and governance (ESG) criteria, which can include companies with a focus on sustainability and renewable energy.
Sustainable real estate: Investing in sustainable real estate, such as energy-efficient buildings and green infrastructure, can be a sustainable alternative to investing in oil.
Overall, investing in oil stocks can be a lucrative opportunity, but it is important to proceed with caution and a well-informed strategy. Knowing the industry’s history, trends, and key drivers is critical to making informed investment decisions. Additionally, diversification is key to managing risk and maximizing potential returns. Investors should carefully consider their individual financial goals, risk tolerance, and portfolio objectives when investing in oil stocks, and seek professional advice as needed. With careful consideration and a disciplined approach, investing in oil stocks can potentially be a valuable addition to a diversified investment portfolio.
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FAQs
What are oil stocks?
Companies involved in the production, transportation, and refining of crude oil are commonly referred to as oil stocks. These companies are usually classified as upstream exploration and production (E&P) entities, responsible for discovering and extracting crude oil, natural gas, and natural gas liquids from underground reserves, and subsequently bringing them to the surface for production.
How do I start investing in oil?
Similar to other sectors, there are various ways to invest in oil companies. Investors can purchase the common stock of an individual oil company, invest in an oil or energy mutual fund, or opt for an exchange-traded fund (ETF) that tracks either the entire sector or a specific segment of it.
What is the best way to buy oil stock?
One of the best ways to buy oil stocks is by opening a brokerage account with a reputable online broker, like Public, or traditional investment firm that offers access to the stock market, conducting research on companies in the oil industry, and investing in stocks that align with your investment goals and risk tolerance.
What are some components of the oil value chain?
The oil value chain includes exploration and production of crude oil, transportation and storage, refining of crude oil into various petroleum products, and distribution and marketing of the final products to end-users.
What happens to oil stocks during inflation, recession & war?
During inflation, oil stocks may rise in value as the demand for oil typically increases with rising prices. In a recession, oil stocks may decline in value due to reduced demand for oil and a decrease in economic activity. During times of war, oil stocks may be impacted by geopolitical tensions, supply disruptions, and changes in government policies related to the oil industry. These factors may result in fluctuations in the price of oil and affect the performance of oil companies, potentially leading to increased volatility in oil stocks.
Do oil stocks pay dividends?
Yes. ExxonMobil and Chevron, in particular, are traditionally well-known for their consistent dividend payouts to shareholders, which makes oil stocks, in general, an attractive investment option. The historically stable and profitable nature of these companies, which are considered blue-chip stocks, could be viewed as a contributing factor to their consistent dividend payouts.