How can one buy oil shares in Australia?

Summary

• Crude oil has registered a surprising journey with prices plummeting to negative levels in April 2020.
• Increased vaccination and significant production cuts by OPEC have stabilised the oil market.
• Investors can capitalise on oil by purchasing oil stocks, ETFs, trading oil futures, and investing in MLPs.

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Oil has recorded a very surprising journey in 2020 and 2021. The deadly claws of COVID-19 have had a devastating impact on a lot of lives and forced everyone to stay behind closed doors. The frightening situation forced governments across the globe to halt international travel and companies to switch into work-from-home mode.

Shopping complexes, stores, entertainment hubs, restaurants, automobiles, and the construction industry were among the main businesses that were severely affected by the impacts of COVID-19.

The sprawling impact of COVID-19 was seen on the oil industry too as the prices of WTI crude oil declined to negative in April 2020 because there were nearly no buyers as travel ground to a halt amid lockdowns. These were some of the darkest days ever that the oil industry witnessed in its entire history.

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Interesting Read: What are the factors that influence global crude oil prices?

However, things seem to have gained back the lost momentum as the price has surpassed the mark of US$70 per barrel. The combined efforts by OPEC and worldwide frontline workers to increase the availability of vaccine in every corner of the world have significantly reduced the number of infections and eased global lockdowns. 

Enhanced economic recovery, rising energy demands, and controlled production by OPEC and its allies have resulted in crude oil prices rising more than 70% in the last one year. Many investors have capitalised on the ongoing crude oil rally. So, let us have a look at how investors can buy oil shares in Australia and multiply their wealth.

How can investors invest in oil in Australia?

There are four primary ways for investing in oil in Australia – buying oil stocks, trading oil futures, oil ETF investment, and investment in MLPs. Let us look at all these four options one by one.

Must Read: How crude oil dynamics influence the upstream and downstream sectors

Oil Company Stocks

Investment in ASX-listed oil companies can be done by purchasing the shares of the companies dealing with the exploration and production of crude oil like Woodside Petroleum (ASX:WPL) and Oil Search Limited (ASX:OSH). Investors can also invest in the integrated companies, which are serving the entire value chain of the oil & gas industry, starting from exploration to marketing of petroleum products.

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In a general scenario, the stock prices of upstream companies, which only deal in exploration and production of crude oil, go up with increasing crude oil prices in the international market.

Sometimes, the stock prices of upstream companies may become volatile due to their direct link with crude oil prices, creating a potential risk for investor. However, investing in integrated companies can be a relatively good option as they can effectively balance their earnings during oil crisis periods, leading to lower volatility in their stock prices.

The shares of oil companies can be purchased via a broker or a financial advisor.

Oil ETFs

The second option for investors is to put their money in oil exchange-traded funds (ETFs), which are focused on holding the stocks of the companies dealing in oil & gas. The process of buying ETFs is much like buying stocks.

There are two options to buy an ETF – industry-based ETFs and commodity-based ETFs. While an industry-based ETF allows an investor to track the stock price of an oil company; a commodity-based ETF allows the tracking of oil prices. ETFs reduce investors' risk by investing in the broader sector rather than investing in individual companies.

Must Read: Pockets of investment shooting up in the renewable energy sector.

Trade Oil Futures

Oil futures trading allows an investor to speculate on the future oil prices through derivatives contracts. Investors can buy a contract of future date for physical delivery which can be sold, allowing investors to profit from oil price fluctuations.

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In Australia, oil futures are traded through a commodities CFD broker where contracts are traded instead of physical oil. Futures trading can be relatively riskier than other investment options and it is recommended for more experienced traders only.

Brent crude oil futures and WTI crude oil futures are the most widely traded ones in the world.

Investment in MLPs

A master limited partnership (MLPs) is a form of publicly traded limited partnership which combines the tax benefit of a private partnership with the liquidity of a publicly traded company.

The slowdown of energy demand could risk the MLPs. Other factors like the commodity price fluctuations, environmental hazards, and tax law reforms can also affect the risk of an MLP.

Good Read: How climate change policies are impacting oil giants: opportunity vs risk

MLPs are well known for their steady income and above-average returns. Typically, there are two types of partners in an MLP organisation – limited partner and general partner.

General partners are responsible for day-to-day operations of the MLP, like management control in lieu of ownership stake, while limited partners are outside investors who provide capital for the MLP’s acquisition but they don’t have any say in the management.