Should You Invest In Oil In 2024? (Pros, Cons, Alternatives)

Oil is one of the most essential commodities in the global economy. This fossil fuel is used to generate energy, create petroleum products, and manufacture all sorts of end-user goods. 

This makes the oil market a lucrative investment that performs well even in times of inflation, recession, and other economic instabilities.

But, the oil market can be tricky to navigate. With the ongoing pandemic and the Russian invasion of Ukraine, knowing how to invest in oil is more valuable than ever for investors. 

Let’s discover why you should invest in oil, the best ways to do it, and some drawbacks you should consider. Also, find out why fine wine is a phenomenal alternative investment and how Vinovest can help diversify your portfolio.

Why Invest In Oil

Oil (also known as crude oil), is the thick, black sticky fossil fuel extracted from an underground oil well.

Since oil is one of the most essential commodities in the global economy, it also makes a very lucrative investment.

Here are some of the advantages of investing in oil:

• Inflation hedge: Oil is an excellent inflation hedge since the crude oil price increases with inflation. In fact, a rising oil price is a massive contributor to rising inflation rates worldwide. This is because the changing oil price affects everything from gas prices to the prices of petroleum products and consumer goods. So, while inflation eats away at your fixed income, an oil investment can protect your portfolio.
• Portfolio diversification: You don’t want your investment portfolio to rely on only one investment type. If you only invest in stocks and the stock market crashes, you’ll need a backup plan. Oil serves as a good portfolio diversifier - if one of your investments loses value, oil can still provide positive returns.
• Source of passive income: Whether you invest in crude oil futures, oil stocks, energy stocks, mutual funds, or ETFs, you’ll earn a passive income - giving you a stable cash flow. So, once you’ve invested in an oil mutual fund, you can sit back as your investment adds to your fixed income.
• High returns: The oil market can be very volatile, so there’s risk involved. But this volatility comes with the potential for significant returns. For example, if you bought a barrel of crude oil in August 2021, you would’ve paid about $60. By March 2022, you could’ve sold that barrel for $119 - that's a 98% increase.

Now, let’s look at some oil investing methods.

How To Invest In Oil

There are many ways to invest in oil, and beginner investors don’t have to worry about storing giant barrels of crude oil in their backyards.

Here are some of the different oil investments you can make:

• Oil Futures & Options
• Oil ETFs & ETNs
• Oil Mutual Funds
• Oil Stocks

1. Oil Futures & Options

The futures market is the primary market for crude oil trading, and a crude oil futures contract is more advanced than simply buying oil stocks or ETFs.

If you buy a crude oil future, you’re buying a contract that obliges you to purchase 1000 barrels of crude oil at a negotiated price in the future. 

For example, you can buy a crude oil futures contract that gives you the right to buy crude oil at  $100 a barrel in the future. So, if the crude oil price increases and oil begins trading on the futures market for $200 a barrel, you’ll be able to buy it at a lower price. 

You can then sell your future contract to a buyer to earn a profit and receive a cash settlement. Or, you can let your contract expire and receive your oil for $100.

Selling your futures contract before it expires and settling with cash is known as futures trading. 

On the other hand, if you don’t want to worry about receiving crude oil barrels, there’s another alternative. Oil options are contracts where you get the option (but not the obligation) to buy oil barrels for a predetermined price on a specific date in the future.

2. Oil ETFs & ETNs

Oil Exchange Traded Funds (ETFs) allow you to invest in a fund that holds oil stocks, barrels, or crude oil futures contracts.

Oil ETF trading occurs on major stock market exchanges, and investors agree that ETFs are an easier way to invest in oil than buying a crude oil futures contract. Another benefit to ETFs is that you’re not required to store any crude oil barrels in your backyard.

Here are some different oil ETFs you can invest in:

• The United States Oil Fund
• The Investco DB Oil Fund
• The iShares Dow Jones US Oil & Gas Exploration & Production Index Fund

Also, keen investors have the option to buy Exchange Traded Notes (ETNs). ETNs are more like bonds. They’re an unsecured form of debt note issued by an institution. So, if you purchase oil ETNs from an oil drilling company and they go bankrupt, your investment would default.

Unlike oil ETFs, if you invest in oil ETNs, you don’t actually own the underlying stocks or futures contracts. Rather, you’re paid the returns that these securities generate.

3. Oil Mutual Funds

Oil mutual funds are baskets of oil stocks that you buy all at once. Investing in an oil mutual fund provides better diversification compared to a portfolio with only stocks and bonds in it but doesn’t provide the diversification of a broad index fund.

If the oil industry were to tank, an oil fund would perform worse than a more diversified fund.

4. Oil Stocks

Oil stocks are shares in oil companies. Oil companies are involved in either refining or extracting crude oil from an underground oil well. 

There are various oil companies on the stock market, so researching which energy stock and oil companies to choose is essential.

Let’s look at 5 fantastic oil stocks:

• Exxon Mobil: Exxon Mobil is the largest United States oil producer. The Exxon Mobil oil company has a 35% correlation to the crude oil price, and this oil stock pays a 4.1% dividend.
• Occidental Petroleum: Occidental Petroleum ranked 183rd on the 2021 Fortune 500. They’re an American company engaged in hydrocarbon and petroleum products exploration in the United States, the Middle East, Canada, and Chile.
• APA: Formerly known as Apache, APA is a major United States natural gas and oil producer. APA shares have a 47% correlation with the WTI (West Texas Intermediate) crude oil prices - the highest of any stock recommended by the Bank of America.
• Baker Hughes: Baker Hughes provides equipment and technology to the energy sector, and this big oil company has a 44% correlation to the WTI crude oil price.
• Chevron: Chevron is one of the largest United States oil companies, and this energy stock has a 44% correlation to the crude oil price.

But, what is the downside to investing in oil?

Drawbacks Of Investing In Oil

The main disadvantage of investing in oil is volatility.

Like most commodities, oil is heavily affected by global demand, supply, and technological factors. 

• Global Demand: When oil demand falls, the oil price decreases since people aren’t as willing to pay for oil. Also, there’s only a finite amount of oil reserves.
• Global Supply: A decrease in oil supply increases prices. For instance, the current Russian invasion of Ukraine has led to global boycotts of Russian oil. This decrease in supply has raised crude oil prices, and oil is happily trading above $100 a barrel. But once the conflict ends, experts think there will be a sharp decline in crude oil prices.
• Technology: Countries are increasingly moving towards renewable energy sources. As technology in the alternative energy sector improves, oil demand will decrease.

Furthermore, the oil market follows similar peaks and troughs to the broader stock market. So, increased market volatility in one area of the global stock exchange is likely to affect oil.

Now, let's look at an alternative investment with all the benefits of oil but none of the drawbacks - fine wine. 

Fine Wine: A Phenomenal Alternative Investment

Like oil, fine wine is an alternative investment that provides lucrative returns. For example, over the last 15 years, wine has outperformed the S&P 500 by 5.1%, and the S&P 500 includes 61 big oil companies. 

However, fine wine isn’t as volatile as oil. Wine bottles become rarer with age, so the longer you hold onto your wine investment, the less volatile it becomes.

Also, wine is an excellent inflation hedge because as inflation increases, so do wine prices.

But, the wine market follows similar trends to the oil market since transportation and glass bottle manufacturing requires oil.

So, a decline in the oil market impacts wine.

You can invest in wine in several ways:

• You can buy, store, and sell bottles yourself.
• Buy and sell wine through brokers.
• Bid at wine auctions.
• Invest in wine stocks and bonds.

However, finding a trustworthy broker can be difficult, and buying bottles yourself is time-consuming since knowing when to sell requires lots of research. Furthermore, ensuring you have temperature and humidity-controlled storage facilities for your wines is expensive.

Luckily, a trusted wine investment platform like Vinovest offers the easiest way to procure, authenticate, and manage a portfolio of investment-grade wines. They’ll even store your wines for you in their temperature-controlled bonded warehouses.

You can then have your wine delivered to you or have Vinovest’s wine experts sell it for you at the right time.

Spice Up Your Portfolio With Alt Assets Like Fine Wine & Oil

There are numerous ways to invest in oil, from buying barrel futures to investing in big oil company stocks. But, oil can be a volatile investment as economic growth, wars, and global demand drastically affect crude oil prices. Although wine prices correlate to the oil price, they’re much less volatile. So, if you’re looking to diversify your portfolio, wine may be a better option.

Sign up with Vinovest today to begin your wine investment journey and invest in rare and authentic wines from around the world.