Oil seems like a sure thing. We need oil for energy right now and despite a drop in oil prices many producers continue to reap huge revenues and profits. Many analysts believe that with many oil stocks down as much as 30% that we are due for a rebound in the market. (See Should I invest in Oil in 2016?)
Here are a few ways to play the commodity:
1) Futures Contracts & Contract for Difference (CFDs)
A future’s contract was the original method for getting your hands dirty in oil. Needless to say, most people investing in these contracts are sophisticated investors. This is a high-risk investment option and you should bear in mind that your capital is at risk.
You can speculate on the price of a commodity (and other things) rising or falling – you are in effect trading the “right” to buy or sell a certain commodity at a pre-determined point in the future.
In this case you could start trading in Brent Crude Oil without having to store physical barrels of oil.
RBOB Gasoline is a different way to play oil. Rather than invest direct in barrels, you’re buying into gasoline – a product of oil. This is the same gasoline that is put into your vehicle at the gas station.
2) Oil Stocks
Stocks are simple to understand, and one of the best ways to invest in crude oil. Stocks represent a part ownership in a company.
There are many companies who are heavily impacted by a shift in the price of oil. Acquiring shares in these companies can give you indirect exposure to oil. Realistically if you are buying shares in an oil company then you are in effect taking a long position in oil i.e. you believe the price of oil is going to increase.
Companies like Exxon Mobil, British Petroleum Plc, Chevron Corporation, ConocoPhillips, Royal Dutch Shell Plc, Transocean Ltd, Anadarko Petroleum Corporation, Petrochina Co Ltd, Petroleo Brasileiro, Halliburton Company, and Apache Corporation are some of the biggest players in the oil industry.
Any one of these companies could be a good investment if you’re willing to do the footwork and dig deeper into the fundamentals and balance sheets.
3) Oil ETFs
Exchange-traded funds are a way for investors to get exposure to oil without having to buy companies directly. Instead, you buy into an ETF that tracks either futures contracts or an index comprised of oil companies.
United States Oil Fund, United States Brent Oil Fund, Energy Select Sector SPDR, United States 12 Month Oil Fund, S&P GSCI Crude Oil Total Return Index ETN, S&P Global Energy Index Fund, DB Oil Fund, United States gasoline Fund LP, and SPDR S&P Oil and Gas Explor & Product are all ETFs that aim to capture exposure to the oil market.
Some ETFs, like the United States Brent Oil Fund will track futures for Brent oil. which is a heavier crude. Others, like SPDR S&P Oil and Gas Exploration & Production track companies that are actively involved in exploration and production.
4) Oil Stock Options
Stock options are contracts that give you the right, but not the obligation, to buy or sell a specific number of shares of stock in a company for a predetermined price and for a predetermined amount of time.
Call options are contracts giving you the right to buy, while put options are the right to sell.
Buying options on oil company stocks allows you to use leverage, since options contracts themselves are inexpensive compared to the underlying stocks.
For example, if you wanted to buy shares in Exxon Mobil, you could buy the company stock directly. But, if you suspected that Exxon was poised for explosive growth, then you might want to buy a call option on the company. This would give you the right to buy shares in Exxon for a preset price within 3 or 6 months (or, in rare circumstances, 1 year).
The contract itself may only cost $500 or $1,000 whereas the shares themselves may be 10, 20, or 50 times that cost.
With an options contract, you’re controlling the underlying shares without actually owning them. If the shares move as you expect them to, you either sell your options contract for a handsome profit, or you exercise the option and simultaneously buy and sell the underlying shares, instantly profiting from the transaction.
A REIT is a real estate investment trust. But wait. You want to invest in oil. Relax. REITs are a way to back into the oil market through real estate holdings. Corenergy is one such REIT. It owns natural gas pipelines as well as oil.
One reason investors have traditionally loved REITs is because they’re uncomplicated. They’re easy to own inside of retirement accounts, can be sold off without too much trouble, and are less complicated in terms of taxes.
Corenergy also started life as Tortoise Capital Resources Corporation, which was a business dev company. While most investors try to go after oil directly, either through drilling operations or producers or futures contracts on oil itself, these companies get into the pipeline.
Regardless of who produces oil, someone has to ship it somewhere for it to be used. And, because it’s a REIT, it must distribute at least 90 percent of its taxable income to shareholders in the form of dividends. So, if the REIT is profitable, you’re going to get paid. Period.