With global oil consumption reaching over 100 million barrels per day, investing in oil presents a compelling opportunity for investors in the UK.
In this article, I will explore the ins and outs of investing in oil, including key considerations, strategies, and potential returns.
Get ready to dive into the fascinating world of oil investments and unlock its potential for your portfolio.
Table of Contents
Ways to Invest in Oil in the UK
There are several avenues to explore when considering investing in oil.
You have the option to directly invest in physical oil, or indirectly through avenues such as purchasing shares in renowned oil companies like BP, Shell, and ExxonMobil, investing in mutual funds or ETFs, engaging in spot price trading, futures or options trading, and even considering investments in Master Limited Partnerships (MLPs).
By exploring these different routes, investors can find opportunities that align with their risk appetite and investment goals.
Invest in Oil Company Stocks
Investing in oil company stocks allows you to participate in the performance and profits of companies directly involved in oil exploration, production, refining, and distribution.
Companies such as BP, ExxonMobil, and Chevron are examples of well-known oil companies whose stocks can be traded on stock exchanges.
Pros:
- Potential for long-term capital appreciation if the oil company performs well.
- Dividend payments may provide regular income.
- Access to a wide range of oil companies, allowing for diversification.
Cons:
- Stock prices can be volatile and influenced by various factors beyond oil prices.
- Oil company stocks may be affected by geopolitical risks, regulatory changes, or environmental concerns.
- Individual stock selection requires careful analysis and research.
Invest in Oil ETFs
Oil Exchange-Traded Funds (ETFs) offer a convenient way to gain exposure to the oil market without directly buying individual stocks.
These funds typically track the performance of oil-related indexes or invest in a portfolio of oil-related assets.
Investing in oil ETFs provides diversification and flexibility for investors.
Pros:
- Offers diversification across multiple oil-related assets within a single investment.
- Convenient and cost-effective way to gain exposure to the oil market.
- Can be traded like stocks, providing liquidity and flexibility.
Cons:
- ETF performance may be influenced by factors beyond oil prices, such as fund management decisions.
- Expense ratios and other fees associated with ETFs can impact overall returns.
- ETFs may not perfectly track the performance of the underlying oil-related index.
Invest in Oil Futures
Investing in oil futures involves trading contracts that obligate the buyer to purchase a specified quantity of oil at a predetermined price and date in the future.
This method requires specialised knowledge and understanding of the futures market.
It is commonly utilised by professional traders and institutional investors.
Pros:
- Potential for significant profits due to leverage and price volatility.
- Direct exposure to oil price movements without the need to physically own or store the commodity.
- Access to a highly liquid and regulated market.
Cons:
- Futures trading requires specialised knowledge and experience.
- High level of risk due to price fluctuations and leverage.
- Potential for significant losses if market movements are unfavorable.
Invest in MLPs
Master Limited Partnerships (MLPs) are publicly traded partnerships primarily engaged in the transportation, storage, and distribution of oil and gas.
Investing in MLPs offers potential income through regular distributions and the opportunity for capital appreciation.
However, MLPs have specific tax considerations, so it’s advisable to consult a tax professional.
Pros:
- Potential for regular income through distributions, which can be higher than dividends from traditional stocks.
- Tax advantages, such as the potential for tax deferral on distributions.
- Exposure to the midstream sector of the oil and gas industry.
Cons:
- MLPs have complex tax implications and require additional paperwork during tax filing.
- Sensitivity to changes in energy prices and regulatory environment.
- Limited diversification as MLPs are concentrated in the midstream sector.
Where to Invest in Oil in the UK?
If you’re looking to get started, I have identified two top-notch brokers that I personally trust and recommend.
These brokers have undergone thorough testing and reviews, ensuring they provide a safe and secure trading environment.
They offer a comprehensive suite of tools and resources to support your investment activities effectively.
With these brokers, you have various options to invest in oil, including stocks, ETFs, futures contracts, CFDs, and mutual funds.
1. eToro
Let me introduce you to eToro, the world’s largest social trading platform, boasting over 30 million users.
I value the peace of mind that comes from knowing that eToro is authorised and regulated by reputable entities like the UK FCA, CySEC, and ASIC.
What sets eToro apart is its access to a vast range of markets, with over 2,400 options including crude oil, oil stocks, oil ETFs, as well as currencies, indices, and commodities.
And here’s the best part: trading these assets on eToro is 100% commission-free.
While there may be fees to consider, such as the spread (the difference between buy and sell prices) charged by most brokers, eToro offers competitive rates.
Additionally, if you opt for oil stocks, you won’t incur any overnight fees, and they remain commission-free.
One of the platform’s standout features is the ability to discover successful traders and effortlessly copy their strategies with a simple click.
Through the CopyTrader feature, you can evaluate different traders’ performance and replicate their trades in your own account.
Another noteworthy aspect is the Smart Portfolios section, which offers expert-designed, ready-made portfolios focused on major market themes.
You can invest in portfolios like Oil Worldwide, Drone Tech, 5G Revolution, Mobile Payments, and many more.
Given the wide variety of markets and product offerings, eToro enables you to diversify your portfolio effectively when venturing into the oil market.
The low fees, including competitive spreads and overnight charges, help you retain a greater portion of your profits.
Plus, opening an account is quick and hassle-free, taking only a few minutes of your time.
On top of this, they have an ‘Excellent’ rating on Trustpilot (which is quite rare for a trading app), with over 18,000 reviews.
- Fees: Commission-free trading, $5 withdrawal fee, $10 inactivity fee, currency conversion fees
- Minimum balance: £10
- Instruments: Stocks, Index CFDs, ETF CFDs, Investment Trusts, Forex, Crypto and Commodities.
Read my eToro review UK.
2. Plus500
Another popular choice for traders with a limited budget is Plus500.
With a minimum deposit requirement of £100, Plus500 allows you to trade crude oil as CFDs with the advantage of commission-free trading and low spreads.
If you’re looking for a cost-effective option, Plus500 is worth considering.
One of the notable advantages of trading with Plus500 is the abundance of excellent resources available for research and market analysis.
These resources can support you in making informed trading decisions and staying updated on the latest trends and developments in the crude oil market.
However, it’s important to note that Plus500 has a proprietary platform, which may be a limitation for traders seeking more advanced tools and features.
While the platform is user-friendly and suitable for beginners, it may not offer the extensive customisation or sophisticated trading capabilities desired by experienced traders.
Beginners must use the demo account and the Trading Academy to gain experience before trading with real capital due to the risks involved.
In addition, Plus500 imposes various fees that traders should be aware of. These include overnight fees, which are charged for holding positions overnight, as well as inactivity fees for dormant accounts.
Conversion fees may apply when trading different currency pairs, and there may be other types of fees depending on your specific trading activities.
Considering both the advantages and disadvantages, Plus500 is an attractive option for traders operating on a smaller budget who prioritise low-cost trading and access to research resources.
However, if you require advanced trading features or have specific preferences regarding platform versatility, it may be worth exploring alternative brokers that better align with your needs.
Read my Plus500 review.
How to Choose the Best Platform to Invest in Oil
Choosing the best stock broker for oil investment is crucial to ensure a smooth and successful trading experience.
Here are some key factors to consider when selecting a stock broker:
- Regulation & Reputation: Opt for a broker that is regulated by reputable financial authorities. This ensures they adhere to strict standards and provides you with a level of protection as an investor.
- Trading Fees & Commissions: Evaluate the broker’s fee structure, including trading commissions, spreads, and any other charges. Look for competitive rates that align with your investment budget and trading style.
- Available Markets & Instruments: Confirm that the broker offers a wide range of oil-related instruments such as individual stocks, ETFs, futures contracts, or CFDs. This allows you to diversify your investment and choose the most suitable option for your strategy.
- Trading Platform: Assess the broker’s trading platform for its user-friendliness, speed, reliability, and availability of essential features like real-time market data, advanced charting tools, and order execution capabilities.
- Research & Educational Resources: Look for brokers that provide comprehensive research materials, market analysis, and educational resources related to the oil industry. These resources can help you stay informed and make well-informed trading decisions.
- Customer Support: Consider the quality and responsiveness of the broker’s customer support team. It’s essential to have reliable support available in case you encounter any issues or have questions related to your oil investments.
- Security & Account Protection: Prioritise brokers that employ robust security measures to safeguard your funds and personal information. Check if they offer account protection schemes or insurance coverage to provide an extra layer of security.
- Mobile Trading Capabilities: If you prefer to trade on the go, ensure the broker offers a mobile trading app that is compatible with your device. This allows you to monitor your oil investments and execute trades conveniently from anywhere.
- User Reviews & Recommendations: Read reviews and seek recommendations from other traders or reliable sources to gauge the overall satisfaction level and experiences of investors with the broker you are considering.
Is Oil a Good Investment?
Oil can be a good investment for some investors, but it also comes with inherent risks and considerations.
Here are some points to consider when evaluating oil as an investment:
- Market Volatility: The oil market is known for its volatility, which can present both opportunities and risks for investors. Fluctuations in oil prices are influenced by various factors, including global supply and demand dynamics, geopolitical events, and economic conditions.
- Diversification: Including oil in your investment portfolio can provide diversification benefits. As oil prices are influenced by different factors than other asset classes, they can act as a hedge against inflation or serve as a counterbalance to other investments in your portfolio.
- Potential Returns: In periods of high demand and rising prices, oil investments can generate attractive returns. However, it’s important to note that the oil market is subject to cyclical trends, and prices can experience significant fluctuations over time.
- Geopolitical Risks: Oil prices can be impacted by geopolitical tensions, conflicts, and disruptions in major oil-producing regions. Such events can create volatility and affect the stability of oil investments.
- Environmental Factors: Growing concerns about climate change and transitioning to renewable energy sources may impact the long-term demand for oil. Investors need to consider the potential shifts in energy policies and regulations that could affect the profitability of oil investments.
- Industry-Specific Factors: Investing in oil requires an understanding of the industry’s dynamics, including exploration, production, refining, and distribution. Factors such as technological advancements, supply chain disruptions, and changes in market dynamics can influence the performance of oil-related investments.
- Risk Management: Investing in oil can involve various investment vehicles, such as stocks, ETFs, futures contracts, or energy-focused mutual funds.
Factors That Affect Oil Prices
Several factors can influence oil prices, creating fluctuations in the market.
Understanding these factors is crucial for investors and industry participants.
Here are some key factors that affect oil prices:
Supply & Demand Dynamics: The balance between global oil supply and demand is a primary driver of oil prices. If demand surpasses supply, prices tend to rise, while an oversupply can lead to price declines. Factors such as economic growth, industrial activity, population growth, and transportation needs influence oil demand. On the supply side, production levels, inventories, geopolitical events, and disruptions to oil infrastructure impact the availability of oil.
OPEC & Non-OPEC Actions: The Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC countries play a significant role in influencing oil prices through their production decisions. OPEC, in particular, can adjust its production quotas to stabilise or manipulate prices. Agreements to increase or decrease production among these countries can have a direct impact on oil prices.
Geopolitical Events: Political tensions, conflicts, or disruptions in major oil-producing regions can significantly affect oil prices. Events such as wars, sanctions, political instability, and supply disruptions due to natural disasters or accidents can lead to price volatility. Investors closely monitor geopolitical developments to assess potential impacts on oil supply and prices.
Economic Factors: The health of the global economy has a direct correlation with oil demand. Economic indicators such as GDP growth, employment rates, consumer spending, and industrial production influence oil prices. During periods of robust economic growth, oil demand tends to increase, supporting higher prices. Conversely, economic slowdowns can lead to reduced oil demand and lower prices.
Currency Exchange Rates: Oil is typically traded in U.S. dollars. Changes in currency exchange rates can impact oil prices, especially for countries whose currencies are not pegged to the dollar. When the value of a currency weakens against the dollar, it requires more of that currency to purchase oil, potentially raising oil prices in that country.
Inventories & Storage Capacity: Oil inventories levels, both globally and regionally, affect prices. Higher inventory levels can indicate oversupply and put downward pressure on prices. Conversely, low inventories or supply disruptions can drive prices higher. Additionally, the availability and capacity of storage facilities play a role in price fluctuations, especially during times of oversupply.
Energy Transition & Environmental Factors: Environmental concerns, climate change policies, and shifts towards renewable energy sources can impact the long-term outlook for oil demand. Increased focus on clean energy, regulations on carbon emissions, and advancements in alternative technologies may affect the future demand for oil and thus influence prices.
How to Pick Oil Stocks
When selecting oil stocks for investment, it’s essential to conduct thorough research and consider several factors to make an informed decision.
Here are some key steps to help you pick oil stocks:
- Understand the Oil Industry: Gain a basic understanding of the oil industry, including its structure, key players, supply and demand dynamics, pricing factors, and geopolitical influences. This knowledge will provide a foundation for evaluating oil stocks.
- Research & Analysis: Conduct in-depth research on individual oil companies. Look for companies with a strong track record, financial stability, and solid management teams. Analyse their production levels, reserves, exploration activities, and technological advancements. Assess their exposure to different oil-producing regions and their ability to adapt to market changes.
- Financial Health: Examine the financial health of oil companies. Evaluate key financial metrics such as revenue growth, profitability, debt levels, and cash flow. A company with a strong balance sheet, low debt burden, and consistent cash flow generation is generally considered more favorable.
- Reserve Base: Evaluate the size and quality of the company’s oil reserves. Companies with large and diversified reserves are better positioned for long-term success. Assess the maturity and production potential of their reserves, as well as their ability to replenish and expand reserves through exploration and acquisitions.
- Operational Efficiency & Cost Management: Look for companies with a track record of operational efficiency and cost management. Efficient production processes, technological advancements, and effective cost-control measures can improve profitability and resilience in a challenging market environment.
- Industry & Competitive Landscape: Consider the competitive positioning of oil companies within the industry. Evaluate factors such as market share, competitive advantages, access to infrastructure, and relationships with suppliers and customers. Companies with a competitive edge may have a better ability to navigate market fluctuations and generate sustainable returns.
- Regulatory & Environmental Factors: Assess the regulatory and environmental landscape impacting the oil industry. Consider factors such as government policies, climate change regulations, and the company’s commitment to sustainable practices. Understanding potential risks and the company’s response to environmental challenges is crucial for long-term viability.
- Diversification: Consider diversifying your oil stock portfolio by investing in companies operating in different regions, with varying production profiles, and exposure to different market segments. Diversification helps mitigate risks associated with individual companies or specific geopolitical events.
- Stay Informed: Continuously monitor oil market trends, industry news, and company-specific developments. Stay updated on geopolitical events, technological advancements, and emerging energy trends. This ongoing monitoring will help you make informed decisions and adjust your investment strategy accordingly.
Top Oil Stocks in the UK
Here are some well-known oil stocks that are frequently considered by investors:
- ExxonMobil Corporation (XOM): ExxonMobil is one of the largest publicly traded oil and gas companies globally. It has a diversified portfolio of exploration, production, refining, and marketing operations.
- Chevron Corporation (CVX): Chevron is another major integrated energy company involved in various aspects of the oil and gas industry. It operates globally and engages in the exploration, production, refining, and marketing of petroleum products.
- Royal Dutch Shell plc (RDS.A, RDS.B): Shell is a multinational oil and gas company with operations in more than 70 countries. It is involved in the exploration, production, refining, and distribution of oil and gas products.
- BP plc (BP): BP is a well-known oil and gas company with operations across the globe. It engages in exploration, production, refining, and marketing of energy products.
- TotalEnergies SE (TOT): TotalEnergies, formerly known as Total, is a French multinational integrated energy company. It operates in various sectors, including oil and gas exploration, production, refining, and marketing.
Final Thoughts
In conclusion, investing in oil can be a lucrative opportunity for investors in the UK.
By understanding the different investment options available, such as oil stocks, ETFs, futures contracts, and mutual funds, individuals can participate in the potential growth of the oil industry.
However, it’s essential to conduct thorough research, stay updated on market trends, and carefully evaluate the risks associated with investing in oil.
With proper knowledge and strategic decision-making, investing in oil can offer potential returns and diversification to your investment portfolio in the UK.