How to invest in oil


When it comes to natural resources, oil remains one of the most hunted assets on the planet.

An Amec oil rig

It is fundamentally linked to the economies of both the developed and emerging markets of the world and can simultaneously be an indicator for economic health and a driver of it - as we are so dependent on it.


Oil price latest


It is also one of the most volatile commodities available to investors.

Take 2008 as an example, where after crashing through the $100 barrier at the start of the year, by July, the price of Brent Crude had rocketed to a high of $144.95 per barrel only to subsequently crash back down to earth, to a 12-month low of just £38.12 – a staggering 74% collapse.

Oil, often dubbed 'black gold' like many other commodities, such as gold, platinum and corn, has traditionally a low correlation with equities, meaning oil and oil related investments in a portfolio can provide a healthy element of diversification, as well as a hedge against inflation.

Oil and companies linked to oil have a decent track record of outperforming most equity benchmarks during downturns when stock markets are perceived as being weak; however, this may not always be the case in the future.


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Again, like other commodities, the price of oil is intrinsically linked to the basic economics of supply and demand.

The rapidly developing markets of the world are driving up demand. Take China, which delivered the largest demand increase in 2008, up 7.2%, and demand there has been rising every year since 1993, a trend which is not expected to dampen over the long term.

From a supply perspective, oil discoveries have steadily been falling since reserves peaked in 1980 but the world is not exactly running out either, at least not in the near term.

Some would argue that the world is edging ever more nearer to a 'Peak oil' environment, where global productivity reaches its maximum rate. The basic argument is that the world's oil supply is likely to come short of fulfilling global demand, which is unlikely to falter in the short term.

Ways to invest in oil


There are a number of ways an investor can get exposure to oil; the most obvious method is to invest in a company within the oil industry, such as Royal Dutch Shell, Premier Oil, British Petroleum, Dragon Oil or Tullow Oil. But remember commodity stocks are highly volatile so spreading your investments is recommended.

Exchange Traded Funds (ETFs)

Another route to consider would be using an ETF, or Exchange Traded Commodity (ETC) focused on oil. Exchange traded funds, mirror the performance of a particular index or market and investors can trade them during the day in the same way as ordinary shares but they are free from stamp duty charges, and their popularity is rising fast.

ETFs providers include, dbx-Trackers, Lyxor and iShares, which for example offers ETFS Crude Oil, which tracks the price of Crude. Commodity specialist ETF Securities, offers ETFs as well as variations. It has ETFS Crude Oil, which like the iShares fund, simply tracks the price of crude oil - but there are options on this too, designed for the more adventurous.

For example there are ETFs available that are 'short' or 'leveraged' versions, such as ETFS Leveraged Crude Oil. The latter tracks the fortunes of oil with a 2% leverage - it will beat the price of oil by 2% when it's rising but also fall further by 2% when it is going down. The short version is for bearish investors, who expected the oil price to fall. But if you want to spread your investment across the energy spectrum, and include natural gas, you could opt for the ETFS Energy DJ-AIG which tracks the up and downs of the Dow Jones-AIG Energy Sub-Index (SM).


Most UK funds will have exposure to oil, given that commodities and resources firms now make up around a third of the FTSE index of the UK's top firms. The basic fact is that commodities, and especially oil, are difficult to avoid – it is estimated that the typical UK portfolio has an average of 5% invested in oil and oil related stocks.

For example the hugely popular Invesco Perpetual High Income fund has some 4% invested in BP and Fidelity Special Situations has 3.4% invested in Shell. But in regards to more specific plays, and more risky, there is the Junior Oils Trust. It invests in relatively smaller but profitable oil related companies, which the manager believes have the potential to grow rapidly or be targets for a takeover by one of the multinational oil producers. Many big oil firms are discovering that buying up other companies is the easiest way to increase their own oil reserves.

Slightly broader portfolios include the BlackRock Commodities Income investment trust and the Blackrock World Energy fund, the latter for example has more than half of its assets invested in oil and gas related stocks. There is also Investec Global Energy, which invests in a combination of oil producers, refiners and services companies and the First State Global Resources fund has an abundance of its assets invested in energy related stocks.

Updated May 2009, Philip Scott, This is Money

How to invest in oil

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