There are 4 main ways to invest in oil from Australia, but each has it's own unique risk profile and level of exposure to the price of crude oil.
For example, you can buy an oil ETF (exchange-traded fund) which tracks the price of crude oil, or buy stock in an oil-related company, which will offer less direct exposure to the price of oil.
Despite the world slowly moving away from fossil fuels, the oil industry still remains relatively attractive for investors.
Like many commodities, the price of oil fluctuates a lot and traders see this volatility as a chance to make money.
Given it's continued importance in global trade and transportation, many investors are also attracted to oil-related stocks and companies.
In fact, some of the world's largest companies by market capitalisation are oil companies. This includes Saudi Aramco, which is the largest non-tech company in the world, as well as Exxon Mobil, Chevron, Shell and PetroChina.1
1. Invest in oil company stocks
A simple way to invest in oil is through buying oil company stocks.
While oil stocks don't give you direct exposure to the price of crude oil, their performance is often correlated with global oil prices, but will also be influenced by the company's own financial performance and fundamentals.
In order to buy oil stocks, you'll first need to sign up with an online broker or share trading platform.
You can pick and choose a range of stocks and cash out when you want.
It's a simple, accessible and versatile way to access the market.
Oil stocks are volatile, which means there's an opportunity to make high profits.
Many oil stocks are well established in Australia and pay dividends.
Cons
Large businesses are involved in things such as refining, which don't actually benefit from higher oil prices, so oil company stocks might not profit from rising oil prices.
Oil stocks are regarded as being more volatile than other sectors, which means that they're high risk.
2. Invest in oil ETFs
Exchange-traded funds (ETFs) are a way to invest in multiple companies or assets with a single investment.
There are two main types of oil ETF: those that track the performance of oil companies, and those that track the price of crude oil.
An ETF that tracks the price of crude oil is arguably the easiest way for investors to get direct exposure to oil without having to physically buy it, or trade it via futures or CFD markets.
In Australia, we have just one ETF that tracks the price of oil, the BetaShares Crude Oil Index (ASX: OOO), but we do have several resources and commodity sector ETFs that are exposed to oil.
ETFs can be purchased and sold in a manner similar to stocks; however, they can allow investors to reduce risk by investing in the broader sector, rather than individual companies.
Like with stocks, you'll need to sign up with a share trading platform in order to invest in oil ETFs.
ETFs allow for instant diversification across the oil industry at a low price.
ETFs have a better track record of providing safe, more reliable growth.
You will get pretty close to the average return for the sector, especially if you choose an ETF with a lot of oil companies.
Cons
By placing your money in an ETF, you relinquish some control over the split of assets.
Assets within the ETF could be a lag on your returns.
3. Trade oil futures
The futures market allows you to speculate on future oil prices through derivatives contracts. With the traditional method of futures trading, you buy a contract to purchase physical oil at a future date at a specified price, which you can in turn sell.
In Australia, futures are more often traded through a commodities CFD broker where you never actually trade physical oil.
Instead, you're trading a contract that you make a profit or loss on depending on the price change of the underlying asset. This means you can profit from both negative and positive movements in the price of oil.
Futures and CFDs are extremely volatile and riskier than other investment options. Because they use leverage, both profits and losses are magnified, so it's best suited to more experienced traders.
The 2 most widely traded oil markets in the world are the West Texas Intermediate futures (US benchmark) and Brent crude futures (global benchmark).
Pros and cons of oil futures
Pros
Oil futures are among the most actively traded future on the market and hence among the most liquid.
Cons
All futures are volatile investments and oil is no exception. No one can predict with any degree of certainty how the price of oil will fluctuate.
Futures expire on a certain date. If you fail to exercise them prior to expiry, they become worthless.
A Master Limited Partnership (MLP) is a specialised type of business that predominantly exist in the energy industry, including oil.
It has the tax benefits of a private partnership (profits are taxed only when investors actually receive distributions) but is traded on the stock market like any other public company.
Typically, these companies own the pipelines that carry the commodity from one place to another.
The Alerian MLP Index is the most popular way to track the performance of MLPs, and trades on the New York Stock Exchange (NYSE).
Pros and cons of MLPs
Pros
Companies can offer a very attractive dividend payment.
MLPs can easily be purchased through financial advisors or online brokers.
Cons
MLPs are subject to general market risk and low energy demand.
Stock prices don’t necessarily move in lock step with the price of oil.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
Key takeaways
Oil is one of the world's most important commodities and is essential to global transportation and commerce.
The price of crude oil is quite volatile and therefore popular with traders.
It's possible to get exposure to the price of crude oil without having to physically buy it.
What are the risks of investing in oil?
While long-term investments in oil companies can be highly profitable, investors should understand the risk factors before making investments in the sector. These risks include the following:
Price volatility: Large price fluctuations can occur daily due to unpredictable influences such as supply and demand.
Dividend cuts: If a company is unable to earn enough revenue to fund payments to investors, dividends can be cut.
Oil spill risk: Accidents such as oil spills can cause a company's share price to drop significantly. In 2010, BP saw a decline of over 55% to their stock in the wake of the Deepwater Horizon oil spill.
Frequently asked questions
This price is constantly changing, but you can check the current price as well as recent market trends by searching on Google.
Crude oil is a volatile commodity that fluctuates in price all the time. While this makes it attractive to some traders, it also makes it a riskier investment.
Saudi Aramco is the world's largest publicly-traded oil company and the largest non-tech stock in the world.
The United States Oil Fund is an exchange-traded commodity product (ETP) offered by United States Commodity Funds, a US company specialising in managing exchange-traded commodity funds (ETFs).
Important information: Powered by Finder.com.au. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Charlie Barton is a publisher at Finder. He specialises in banking and investments products. Charlie has a first-class degree from the London School of Economics, and in his spare time enjoys long walks on the beach. See full bio
Kylie Purcell is the senior investments editor and analyst at Finder. She has completed a Certificate of Securities and Managed Investments (RG146) and specialises in investment products including online brokers, robo-advisors, stocks and ETFs. See full bio
Kylie's expertise
Kylie has written 134 Finder guides across topics including:
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