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Hey 👋🏼

Let’s be honest: oil isn’t exactly a “sexy” investment. 

It’s messy, it’s old-school, and, for a lot of people, it feels a little… wrong. When you hear about oil, your first thought might be about climate change protests or high gas prices, not an exciting opportunity to grow your portfolio.

But, like it or not, oil powers the world. Planes don’t fly, trucks don’t move, and economies don’t function without it. And while the world is moving toward renewables, oil isn’t going anywhere just yet. That’s why it still holds its place as a major force in the investment world.

So, if you can look past the controversy, there’s value here. 

Let’s break down what it really means to invest in oil - the risks, the rewards, and why it might not be as “dirty” an investment as you think.

I’n this guide, I'll cover:

• Why oil matters
• The forces behind oil prices
• State of the oil market and recent returns
• How to invest in oil
• The risks
• What could the future look like

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Why Oil Matters

First off, oil is a big deal. 

It powers industries, fuels vehicles, and heats homes worldwide. In 2023, global demand hit an all-time high of 98 million barrels per day, and it's only expected to grow in emerging economies as they industrialize. Oil isn’t just a commodity, it’s the lifeblood of the modern world.

But, oil prices don’t always make sense. They’re affected by everything from supply and demand to politics, wars, and even investor speculation. Let’s look at the key factors that shape this market.

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The Forces Behind Oil Prices

Demand:

When oil prices rise, people and businesses tend to use less of it - think driving less when gas prices soar. But in developing countries, demand can stay strong despite high prices, especially when governments subsidize fuel. Interestingly, removing subsidies can actually increase supply, lower prices, and make refined products like diesel and gasoline more available.

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Supply

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On the flip side, supply is all about how much oil is pumped out of the ground. In 2023, production hit a record 101 million barrels per day. However, discovering new oil reserves has slowed since 2014. Many oil producers slashed exploration budgets after prices fell during the 2010s. Countries like Saudi Arabia have some spare capacity, but overall, the market isn’t as flexible as it once was.

Global events also shake things up. When Russia invaded Ukraine in 2022, oil prices skyrocketed to over $125 a barrel due to market disruptions and sanctions.

Quality and Location

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Not all oil is created equal. High-quality, low-sulfur "sweet crude" is the most desirable for making gasoline, but it’s not as abundant as you might think. For example, even though the U.S. produces a lot of oil, it still imports specific types to match its refining capacity. The two most famous types of oil: Brent Crude (from the North Sea) and West Texas Intermediate (from the U.S.) are light and sweet, making them favorites for refiners.

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State of the oil market and recent returns

Global oil demand is expected to grow faster next year, increasing from 840,000 barrels per day (b/d) in 2024 to 1.1 million b/d in 2025. This would bring total daily consumption to 103.9 million b/d in 2025. Most of this growth will come from petrochemicals (used to make plastics, fertilizers, and other materials), while demand for transportation fuels like gasoline will stay steady due to improved technology and changing habits. China’s demand growth is slowing, but other parts of Asia will drive increases over the next two years.

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On the supply side, global oil production rose slightly in November, reaching 103.4 million b/d—up from last year. Supply is expected to grow by 1.9 million b/d in 2025, even without OPEC (the oil cartel) making major changes to its production cuts. Most of this increase will come from countries like the United States, Brazil, Canada, Guyana, and Argentina.

Oil refining activity is also picking up. Refineries - facilities that turn crude oil into gasoline, diesel, and other products - will process more oil in 2024 and 2025 compared to this year. Margins (profits) from refining were better in Asia recently due to stronger demand for diesel, but weaker prices for gasoline have hurt profits in other regions like Europe and North America.

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Global oil inventories (how much oil is stored worldwide) dropped sharply in October but started to bounce back in November. Storage levels in developed countries are below the five-year average, which could impact prices if demand rises quickly.

Finally, oil prices have been stable, with Brent crude—one of the major price benchmarks—hovering around $73 per barrel in November. Prices didn’t move much, staying in a $5 range, as markets weighed concerns about future demand and the security of oil supplies.

How to Invest in Oil

Now for the fun part - how you can invest in oil. There are several ways to add oil to your portfolio, even if you’re a beginner.

Oil Stocks:
Investing in oil companies is one of the simplest ways to gain exposure. You can buy shares in companies that drill for oil, provide services, or transport it.

A few big name stocks out there:

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Exxon Mobil Corporation ($XOM)
One of the largest publicly traded oil companies in the world, known for its integrated operations across exploration, refining, and chemicals.

5 year returns (as of Dec ‘24)  = +58%

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Chevron Corporation ($CVX)
A major U.S.-based multinational energy corporation involved in both traditional oil production and renewable energy projects.

5 year returns (as of Dec ‘24)  = +28%

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BP PLC ($BP)
Formerly British Petroleum, BP is a global energy giant with significant operations in oil, gas, and renewable energy.

5 year returns (as of Dec ‘24) = -19%

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Shell PLC ($SHEL)
A leader in oil and gas production, Shell is also heavily investing in clean energy technologies.

5 year returns (as of Dec ‘24) = +5%

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TotalEnergies SE ($TTE)
A French multinational energy company operating across the oil, gas, and renewable energy spectrum.

5 year returns (as of Dec ‘24) = +3%

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Energy ETFs and Mutual Funds:
If picking individual stocks feels overwhelming, energy sector ETFs or mutual funds could be a better fit. These funds spread your money across multiple oil-related companies, lowering your risk.

• Example ETFs: iShares Global Energy Sector ETF
• Example Mutual Funds: T. Rowe Price New Era Fund

Oil-Tracking ETFs and ETNs:
Want a more direct link to oil prices? Exchange-traded funds (ETFs) or notes (ETNs) that invest in oil futures contracts might be the answer. These track the price of oil more closely than energy stocks and can even act as a hedge against stock market volatility.

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Key Risks of Investing in Oil

Oil can offer big rewards, but it comes with its own set of risks. One of the biggest is how unpredictable the prices of oil can be. When oil prices go up or down, it directly affects the revenue and stock prices of companies in this industry.

Also, oil companies are sensitive to world events. If there’s political instability in key oil-producing countries or disruptions to how energy is transported, it can mess with supply and cause prices to spike. Plus, the push for renewable energy and growing environmental concerns mean that fossil fuel-based companies might face challenges in the future.

Diversification and Risk Management

Because of these risks, spreading your investments across different types of energy companies is a smart move. You could look into companies involved in everything from oil exploration and production to transportation, storage, and even refining.

To manage risk, focus on companies that are financially stable, have diverse assets, and are good at managing challenges. Companies that have low production costs, good cash flow, and a solid track record are in a better position to handle price drops or market changes.

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Thanks for reading!

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Jason

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DISCLAIMER: None of this is financial advice. Finbrain is strictly for educational purposes.

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