Table of Contents
Oil is valuable, and one of the most widely used and widely traded commodities in the world. Despite the growth of many forms of alternative energy, oil remains essential to the global economy. But there are many variables that factor into oil prices, and that makes them fairly volatile, often changing numerous times on a daily basis.
The price of oil has an impact on a wide range of industries, and ultimately on the prices that consumers pay at the pump, in the supermarket, and beyond. That also means it may be attractive to some investors, though it also comes with risks to be aware of.
Key Points
• Investing in oil may be attractive to some investors due to its critical role in global industry and transportation, despite the rise of alternative energy sources.
• Various investment options exist, including oil company stocks, mutual funds, ETFs, and exchange-traded notes that track oil prices directly.
• Market dynamics, including OPEC decisions, global supply and demand fluctuations, and production costs, may influence oil prices.
• Natural disasters and geopolitical tensions could lead to significant price changes, affecting both supply and investor sentiment in the oil sector.
• Oil investment carries inherent risks due to its volatility, making thorough research and consideration of individual investment goals essential before proceeding.
How Do You Invest in Oil?
For those who are interested in incorporating crude oil investing in their portfolio, there are many ways to get started.
How to Buy Oil Stocks
In addition to the massive, well-known companies in the fossil fuel industry, there are other companies that specialize in different aspects of energy production, oil exploration, drilling, equipment, delivery and more. There are also smaller oil companies with vertical operations, but only in specific parts of the world. Each of those types of companies may perform differently depending on the many geopolitical, economic, technological, and other factors that drive the price of oil up and down.
Recommended: Investing in the Energy Sector: What Any Investor Should Know
Oil Mutual Funds and ETFs
Not every investor has the time or interest to research a host of oil companies. For those investors, another approach might be investing in a mutual fund or exchange-traded fund (ETF) that focuses on the oil sector, or more broadly on the energy sector.
Since thematic ETFs and mutual funds hold many securities, they offer investors a level of diversification within their portfolio. At the same time, diversification would be more limited in an oil fund than in a broader index fund — if the entire industry is in a downturn, an oil fund may fall, as well. Diversification can also never fully protect investors from downside risks.
Recommended: Key Differences between Mutual Funds and ETFs
Oil Futures and Derivatives
More sophisticated investors may also consider investing in the derivatives markets, trading futures and options. Purchasing crude oil barrels may require tens of thousands of dollars, but investors may gain exposure to oil investments through options and futures. Crude oil options trade on the New York Mercantile Exchange (NYMEX) and on the ICE exchange, for example.
Derivatives are complex financial instruments that allow traders to speculate on the price movements of an underlying asset. They can be used to increase purchasing power through leverage. With leverage, investors can essentially take a bigger position with less money. Leverage has the potential to amplify returns, but it can also amplify losses if prices move in an adverse direction, making these investments high-risk and generally used by experienced investors.
Oil Exchange-Traded Notes (ETNs)
Exchange-traded notes are unsecured debt securities issued by financial institutions that track the performance of underlying assets, such as indexes or, in this case, oil commodity futures or another oil commodity benchmark. ETNs promise to pay investors the return (if any) on the underlying asset over a specified period of time, plus return the principal investment.
ETNs are considered higher-risk due to the credit risk involved — it’s possible the issuers could default on the payments they owe. In addition, the structure of oil ETNs could in of themselves be riskier. Some, for example, utilize leverage (or inverse leverage) to speculate on the daily performance of an underlying asset, which could scale both rewards and losses.
Alternative Investments
Investors interested in alternative investments — investments outside of traditional stocks, ETFs, bonds, and cash-equivalents — might get exposure to oil by purchasing mineral rights or buying into Limited Partnerships (LPs) that invest throughout the sector. Alternatives are also generally considered higher risk than traditional assets due to potential factors such as valuation complexity, illiquidity, and possible lack of transparency, depending on the asset.
Trends in Oil Investing
Oil prices plummeted in 2020, as pandemic-associated lockdowns drove U.S. oil prices into negative territory for the first time in history. In April 2020, investors bid the price for West Texas Intermediate (WTI) from $18 per barrel, down to roughly negative $37 a barrel.
Later that year, oil prices began to normalize. Demand returned in 2021, and oil prices shot back up in 2022, when they reached levels not seen in decades. Then, in 2023, prices did fall a bit again, and bounced around $60 or $80 for a while. In early 2026, military conflicts in the Middle East caused another spike, and prices rose above $100 – as of late September 2026, prices are hovering around the $100 mark.
Forces That Drive Oil Prices
There are many factors that determine oil prices. That, in turn, could affect prices for gasoline and more. Here are some of the forces at play.
The Organization of Petroleum Exporting Countries (OPEC)
Another important contributor to oil prices is the Organization of Petroleum Exporting Countries (OPEC), a group of 12 oil-producing countries, including Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.
Together, they’re responsible for nearly 80% of the planet’s oil reserves. As an organization, OPEC meets regularly to set production levels. And its decisions could directly change the price of oil and gas. And while it has a massive influence on the price of oil, it doesn’t control the price.
Market Fundamentals
The global oil market is a force in its own right, as supply and demand tend to fluctuate sharply and unpredictably. There might be too much supply, causing prices to fall. Within OPEC, members don’t always follow through on the limits they agreed upon limits. There are also major oil suppliers, such as the United States, who are not OPEC members who may produce more oil than expected. That could cause high levels of supply relative to demand, which could drive down prices.
Production Costs
Oil in Canada’s oil sands or American shale reserves is far more labor-intensive and expensive to extract and refine than the oil in the Middle East. Those extraction costs contribute to the price of the oil, which might drive the oil prices higher or lower, depending on where the bulk of supply is coming from at any given time.
Natural Disasters
Oil prices are also susceptible to change as a result of natural disasters. Hurricanes, for example, regularly shut down oil production in the Gulf of Mexico, which could reduce the supply of oil and drive prices up.
International Relations
The headlines, especially international ones, could also drive oil prices. A significant amount of the world’s oil comes from the Middle East. Political instability in that region creates investor uncertainty, which might lead to price fluctuation. The same goes for countries like Russia, which produces a lot of oil, but is often involved in geopolitical conflicts, and several countries in the Middle East.
Economic Factors
While not always the case, recessions and economic turmoil could push oil prices lower.
The relative strength of the U.S. dollar also plays a role in the price of oil. The thinking is that a strong dollar allows American oil companies to buy more oil, and cut the cost to U.S. consumers, who buy a good percentage of the oil on the market.
However, while oil does not typically perform well during a recession, it does typically become more attractive to investors later in the business cycle.
Is an Oil Investment Safe?
While there may be longstanding demand for oil, it’s important to keep in mind that no investment is “safe.” Oil is volatile, and there are many factors and variables that can influence its supply and demand. Investors should remember that just because oil prices are up one day, they may fall the next. That could affect oil investments, as well as the broader economy.
Investors have different options to choose from to gain exposure to oil, from oil-related stocks, ETFs, and mutual funds to potentially higher risk choices, such as exchange traded notes (ETNs) and oil derivatives. Each has its own risk profile, and it’s important to understand the potential for both rewards and losses before investing in any type of oil asset.
The Takeaway
Oil is always in demand and important to the global economy, which makes it an attractive investment to some investors. Oil is also a volatile and higher risk investment, however, and risk exposure may also vary depending on how you may choose to invest in it, such as through stocks, ETFs, or derivatives. Given that many people are focused on renewable energy sources, too, investing in oil may not be quite as attractive as it once was.
It’s worth considering what role the different types of oil investments might have in your portfolio, and whether they align with your objectives.
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FAQ
What are the best ways to start an oil investment?
There are several ways to potentially invest in oil either directly or indirectly, including oil company stocks, mutual funds, ETFs, and exchange-traded notes that track oil prices directly.
What factors determine oil prices?
There’s a long list of variables that may affect oil prices, including the goals of cartels like OPEC, production costs, natural disasters, and international relations or military conflicts.
What is OPEC?
OPEC is the Organization of Petroleum Exporting Countries (OPEC), a group of 12 oil-producing countries, including Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC makes up nearly 80% of the planet’s oil reserves.
How much money do you need to start investing in oil?
It may be possible to start investing in oil with very little capital, as investors may be able to buy shares of oil-related ETFs or fractional shares of oil-related stocks, with as little as $1 to $100 dollars. Mutual funds often have a higher minimum than ETFs. The amount required to invest in oil derivatives could be substantially higher depending on the contract size and type.
Are there sustainable alternatives to investing in oil?
There are many potential sustainable alternatives to investing in oil, and those could include renewable energy stocks, clean energy funds, or even green bonds. These all have their own pros and cons, of course, so investors should do their research before investing in them.
Photo credit: iStock/kckate16
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