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Oil is one of the most important natural resources on the globe. Think about the role it plays in your everyday life. Oil is used to make gas, which fueled the vehicle that brought the device you’re using to read this into your hands. Not to mention that crude oil is used to manufacture many of the components that go into various electronics.
While oil is so incredibly crucial, oil markets are complex and highly sensitive to geopolitical pressure.
Following U.S. air strikes on Iranian nuclear sites this month, the price of oil soared to a five-month high, triggering concerns over larger blows to one of the world’s top crude oil producers. Brent crude oil, a global benchmark, rose to about $81.40 per barrel. The West Texas Intermediate (WTI), the U.S. benchmark, spiked to about $78.40.
But perhaps the biggest concern was whether Iran would close the Strait of Hormuz. Iran partly owns this waterway, which is used by ships carrying around 20 percent of the world’s oil supply. And even though the United States only imports about 7 percent of its oil through the Strait of Hormuz, its closure could shake global oil markets, which could send shockwaves to gas pumps in the United States.
Nonetheless, oil prices began to dip after Iran retaliated with a strike on a U.S. airbase in Qatar, dropping missiles in the amount equal to those dropped on its nuclear sites. To market analysts, this suggested Tehran wasn’t prioritizing an economic retaliation. Oil prices further decreased following President Donald Trump’s announcement of a ceasefire between Israel and Iran.
However, Iran’s parliament has backed a proposal to close the strait. But the decision ultimately rests with Iran’s national security council. And there’s no way to know how long the Iran–Israel cease-fire could last. In its absence, Israel may strike Iran’s oil production and export facilities, putting even more upward pressure on oil prices.
But like anything else, the oil market also relies on supply and demand. And production is going up globally, easing some pressure on oil prices. In May, the Organization of the Petroleum Exporting Countries (OPEC) proposed to increase production by around 411,000 barrels per day for July. Plus, the Energy Information Administration (EIA) projects that 90 percent of oil production growth this year would come from non-OPEC sources.
Brent crude and the WTI are currently each around $65 a barrel.
But as you can see, the oil markets can be extremely volatile. Still, many find success investing in the oil markets. So if you’re interested, let’s see how you can get started.
How to Invest in Oil
You don’t need to strike oil yourself to invest in liquid gold. You can gain exposure to the oil markets through oil stocks, funds, and futures.
Oil Stocks
Oil stocks are shares of companies that extract and produce petroleum or crude oil. Here are some of the top oil stocks today:
Texas Pacific Land Corporation (TPL)
EQT Corp (EQT Corp)
Targa Resources Corp (TRGP)
Conoco Phillips (COP)
EOG Resources, Inc. (EOG)
However, it’s important you do your due diligence and thoroughly research an oil company before purchasing its stock. Pay attention to details such as the company’s earnings, debts, any dividends, and stock performance.
Oil Funds
Rather than individually picking oil stocks, you could invest in a mutual fund or exchange-traded fund (ETF) that holds various stocks from multiple oil companies. These professionally managed funds offer instant diversification. But it’s important to maintain a diversified portfolio. The oil markets could plummet, leaving your oil fund vulnerable. It makes sense to add an oil fund to an already diversified portfolio with exposure to stocks, bonds, and other securities.
Here are some of the top oil ETFs:
United States Oil Fund LP (USO)
ProShares Ultra Bloomberg Crude Oil (UCO)
Invesco DB Oil Fund (DBO)
ProShares UltraShort Bloomberg Crude Oil (SCO)
Oil Futures
Oil futures are contracts in which two parties agree to exchange a set amount of oil at a specific price at a predetermined date. Some investors use futures contracts to speculate on the price of oil.
If the price of oil rises, your contract could become more valuable, and you can sell it for a profit. On the other hand, you’d lose out if the price of oil drops. However, investing in futures contracts can be complex and is intended for advanced traders.
The Bottom Line
The oil markets can be extremely volatile and heavily influenced by geopolitical risk, especially when conflict arises in the world’s most influential oil-producing countries. However, experienced investors have found the oil markets very lucrative. You can get started with exposure to the oil markets by investing in oil stocks or oil ETFs and mutual funds. More advanced traders can speculate on futures exchanges.
Javier Simon is a freelance personal finance writer for The Epoch Times. He specializes in retirement planning, investing, taxes, fintech, financial products and more. His work has been featured by major publications including Fox Business, The Motley Fool, NerdWallet, and Money Magazine.
