Oil stock prices have rebounded from the lows of 2016, and continue to trade in a narrow range this year. These energy sector shares continue to be worth a look. Oil investing offers outstanding dividend yields, and share prices remain reasonable. As oil company stocks continue to underperform, there’s room to grow in the future.
Here are three reasons to consider oil investing today:
- Globally, there’s more supply than demand, keeping prices low.
- Low oil prices have contributed to oil’s poor performance this year, and ultimately, they’ll rebound.
- The oil commodity is cyclical, and therefore, the time to buy is when oil barrel prices are lower.
Given the frothy stock market today, you should learn how to invest in oil while prices are low — and when the sector rebounds, you might just make a profit.
4 Ways to Invest in Oil
If you’re interested in investing in a commodity that most Americans use daily, oil just might be the ticket for you. Learn more about investing in oil stocks so you can decide if it’s right for your financial strategy. Here are four different ways to invest in oil:
1. Buy Oil and Related Energy Stocks
With oil prices trending near their long-term lows, you can profit from a rebound by buying oil stocks and energy-related stocks. Companies such as Haliburton, ExxonMobil and Chevron hold a claim in the black gold oil markets and can be bought on the stock exchange.
You can learn about this sector from your financial advisor, or research individual oil company stocks and energy industry-related companies on your own. Investigate diversified investments in the energy sector, and read about their profitability, debt levels, dividend payments and more on your broker’s website.
Oil stocks to consider include:
- Chevron (CVX)
- ExxonMobile (XOM)
- BP PLC (BP)
2. Buy Oil and Related Exchange-Traded Funds
If you’re not inclined to devote hours sorting through a list of individual stocks, then treading into the world of oil exchange-traded funds might be for you. With an oil ETF or oil mutual funds, you get a basket of oil company stocks or oil futures contracts in one fund.
Visit your online investment site to examine basic information about the oil sector, and check out the objectives and holdings within an individual oil ETF. Be aware that all oil and energy sector ETFs are not alike. Some of the energy and oil ETFs might not track oil’s price movements accurately if the fund is buying oil futures contracts rather than stock in individual oil and energy-related companies. Additionally, some ETFs use sophisticated leverage in an attempt to bolster returns. If these strategies don’t play out as planned, your fund could suffer, even if oil prices trend upwards.
Investing in the U.S. Oil Fund ETF (USO) is one way to capture the price movements of the West Texas Intermediate light, sweet crude oil. The crude oil ETF, which invests in futures contracts, trades near its 10-year low price of $10.48 as of Oct. 18, 2017, after peaking at more than $100 on Jan. 1, 2008. The lack of a dividend, however, might be a disadvantage for some investors.
Here are additional energy and oil ETFs to investigate:
- iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)
- PowerShares DB Oil Fund (DBO)
- U.S. 12-Month Oil Fund (USL)
3. Invest in Oil Futures
The next approach to oil commodity investing is to buy oil futures. Unless you can buy barrels of oil and store them in your basement, buying oil futures could be the next best thing for oil investing for sophisticated investors.
Oil futures are bought and sold on a commodity exchange such as the New York Mercantile Exchange. Futures contracts allow you to buy or sell a specific amount of oil — in the future. So, if you buy an oil futures contract, and the price of oil goes up before the contract expires, you profit.
Grasping how to buy oil with futures contracts is not for the faint of heart, though, because of the high level of risk involved.
For all but the most sophisticated investors, buying futures is not the best way to invest in oil. To profit from the risky business of investing in oil futures, you need to be right twice: when choosing the price and in the timing. Oil futures investing is better used by a heating oil contractor who wants to lock in the price of oil for his customers, not by a typical investor.
4. Buy Energy Investments With a Master Limited Partnership
In lieu of buying an oil well, investors seeking to profit from low prices on black gold might consider master limited partnerships or MLPs. MLP energy investments have a different structure than other investment funds. MLP shareholders include the general partners who run the fund and the limited partners with no management responsibilities. Investors can buy publicly traded limited partner shares. The general partner units aren’t available for trade or purchase.
MLPs offer high yields, consistent cash flow, opportunities for capital gains, and an alignment of general and limited partners’ interests. But there are disadvantages to investing in oil or energy MLPs: a complex structure with confusing tax reporting requirements and the potential for capital losses. Investigate the MLP and understand the potential risks of your investment and its advantages.
InvestorPlace recommended the following MLPs in February 2017:
- Phillips 66 Partners (PSXP)
- Western Gas Partners (WES)
- Tallgrass Energy Partners (TEP)
Oil ETFs and Oil-Related Stocks Are Most Accessible
Widespread evidence shows that investing in undervalued assets leads to outsized gains. With long-term declines in oil prices, it’s likely that profits will be made upon a rebound. For those most conservative investors with diversified portfolios, owning a Standard & Poor’s 500 index fund means already having about 6 percent exposure to the undervalued energy sector. Ultimately, to profit from a possible sector rebound, an ETF or oil-related stock is most accessible for the individual investor.