There are numerous ways for investors to obtain exposure to oil as an investment. These strategies, which range from direct investing in oil as a commodity to indirect exposure in oil through the ownership of energy-related shares, ETFs, or options contracts, all carry varied degrees of risk. Each of these investment types can be purchased through a broker or through an online brokerage account.
Oil as an Asset
Because oil is the source of so much of the energy we use, it is an economically and strategically important resource for many countries. Large stocks of crude oil are held by countries like the United States for future usage. Changes in oil stock levels are reflections of patterns in production and consumption, and the measure of these reserves serves as a signal for investors.
Aside from supply and demand, investors and speculators bidding on oil futures contracts have also influenced oil prices. Commodity-linked assets are held by many big institutional investors presently participating in the oil markets, such as pension and endowment funds, as part of a long-term asset allocation strategy. Others, such as Wall Street traders, trade oil futures for very short periods of time in order to profit quickly. Some analysts believe these speculators are to blame for large short-term volatility in oil prices, while others say their impact is minor.
Direct Investing in Oil
The purchase of oil futures or options is one direct method of owning oil. Futures are extremely volatile and come with a high level of risk. Furthermore, investing in futures may necessitate extensive research as well as a substantial financial investment.
Another way to directly own oil is to invest in commodity-based oil exchange-traded funds (ETFs). ETFs are traded on a stock exchange and can be bought and sold in the same way that stocks can.
Indirect Investing in Oil
In addition, energy-sector ETFs, such as the iShares Global Energy ETF (IXC),5 and energy-sector mutual funds, such as the T. Rowe Price New Era Fund, can provide investors with indirect exposure to oil (PRNEX). 6 These low-risk energy-specific ETFs and mutual funds invest primarily in the stocks of oil and oil services firms.
Oil is one of the most volatile commodities available for investing. There are numerous opportunities for traders and investors in oil trading every day. However, the volatile nature also makes oil a risky investment option. It is therefore recommended to have an investment advisor help you in investing in oil based on technical analysis.
Happy Investing!
