An investor that is looking to diversify into several sectors might be considering buying shares in oil. The investor wouldn’t be buying shares in oil per se. Rather, he/she would be investing in companies that operate in the oil and gas arena.
In this article, we explain how to buy shares in oil. This includes a breakdown of how the oil investment scene works, the many different investment options available and the UK stockbrokers that offer oil shares.
Before we take a look at oil shares in more detail, here’s a quick look at some of the most popular oil shares.
As the name suggests, ‘oil shares’ is a term used to describe companies that operate in the oil and gas industry. Put simply, you will be buying shares in a company that is listed on a public stock exchange, with the hope that they increase in value in the future.
A prime example of this is BP, the UK-based oil and gas powerhouse that is listed on the London Stock Exchange. By holding BP shares, not only will you have the chance to grow your money through capital gains, but you will also be entitled to dividends as and when they are paid.
As we discuss in more detail further down, it is important to note that there is a direct correlation between the market value of oil with that of a company that is actively involved in the oil industry. In other words, as the price of oil goes up, in theory, as should your shares.
If you are planning to invest your hard-earned money into oil, it is absolutely fundamental that you understand how the industry works. More specifically, you need to have a firm grasp of the many factors that can influence your investment – both good and bad.
Global Oil Prices
First and foremost, oil is a global commodity used by each and every country on planet earth. As a result, there is a globalized standard when it comes to pricing. This is to ensure that buyers and sellers are able to trade oil in a seamless manner.
- Price Per Barrel: When the stakeholders discuss the price of oil, they do so on a ‘per barrel’ basis. In simple terms, if a wholesaler bought 1 million barrels of oil at $29 per barrel, this would translate to a total order of $29 million.
- Dollars: The vast majority of the global oil space is denominated in US dollars. As such, you need to feel comfortable assessing the market price of oil not in British pounds, but US dollars.
- Oil Benchmark: In order to facilitate global prices in a cohesive manner, the financial markets make use of an oil benchmark. This operates in a similar nature to a stock exchange, insofar that the price will change on a second-by-second basis. Although there are several oil benchmarks, the most widely used by investors is the Brent Crude Index. In the US, investors prefer the WTI Crude Index.
Arguably, there is no asset that is influenced by geopolitical events quite like oil. This centers on the ratio between demand and supply. While demand is out of the hands of oil producers, the latter is closely manipulated by major exporters. At the forefront of this is OPEC (Organization of the Petroleum Exporting Countries) – which for all intents and purposes is controlled by Saudi Arabia.
- If OPEC wishes to reduce oil prices, all it needs to do is increase production and exportation levels. In doing so, supply will outweigh demand and thus have a negative impact on the price of oil. If you’re wondering why OPEC would do this when it has a direct impact on profits, everything is politically motivated. For example, in order to fend off competition from US shale oil producers in 2014, OPEC oversupplied the market with cheap oil, subsequently putting US extractors out of business.
- If OPEC wishes to increase prices, then it will simply cut back on production. In doing so, there will be more demand than supply, so naturally, the market value of oil should follow suit.
But then, you also need to consider the demand side of oil shares. That is to say, when the world went on lock-down as per the coronavirus pandemic, demand for oil was virtually non-existence. As a result of this, the Brent Crude benchmark went as low as $15.98 per barrel.
So now that you know how global oil prices work, we now need to explore how this relates to oil shares. In a nutshell, companies that are active in the oil industry, such as BP, Exxon, and Royal Dutch Shell, are heavily reliant on the value of oil.
After all, this is the product that they sell to the wholesale and consumer marketplace – so the higher the price, the higher the margins. Crucially, each and every oil company will have a break-even price. If the market price of oil falls is below this, the firm will be selling at a loss.
- It is believed that BP has a break-even price of $35 per barrel – which is down from its 2017 levels of $40
- This means that for as long as the global price of oil is below $35, for all intents and purposes BP is unable to make a profit
- Taking into account that the value of oil was hit sharply in response to COV-19, BP shares were heavily impacted
- In fact, between January and March 2020 – BP shares lost just under 50% in value – whipping off billions of pounds of market capitalization along the way
Ultimately, buying oil shares is going to require you to be active in the research department. More specifically, you need to be kept abreast of key market developments that could have a major impact on the value of your oil shares. As we cover in more detail shortly, this is why a lot of newbie investors will opt for an ETF.
Oil shares are much like any other stock market investment. The overarching aim is to buy the shares at a lower price than you eventually sell them for.
For example, if you buy £10,000 worth of Exxon shares when they are priced at 500p and then sell them at a price of 550p, you would have made 10%. On an investment of £10,000, this translates into a profit of £1,000.
Most large-scale oil producers are also dividend stocks. This means that you will earn a regular payment on a quarterly or bi-annual basis.
However, as with any kind of investment there’s always the chance you will lose money rather than gain it, so bear this in mind.
Like the sound of adding some oil shares to your stock portfolio, but not too sure which companies to pick? Below we list some popular oil shares.
We have already discussed BP, so there is no need for an introduction to the services supplied by the firm. With that said, BP stands out for a number of reasons. Firstly, and as we covered earlier, BP shares crashed by almost 50% in the space of just two months between January and March 2020.
This was the case with most oil shares active in the space, mostly because of the COV-19 pandemic. In fact, had you bought BP shares in mid-March, you would have paid around 240p. At the time of writing in July 2020, those same shares are worth 311p.
This represents an increase of 29%. However, BP still has a long way to go to hit pre-COV 19 levels, where the shares were priced at around 500p. If and when it gets there, this would represent a further increase of 60%.
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2. Royal Dutch Shell – Firm History of Paying Attractive Dividends (LSE)
Royal Dutch Shell is a UK oil and gas organization based in the Netherlands. The firm is one of the largest companies on the FTSE 100, with revenues of over $340 billion in 2019. The reason that Royal Dutch Shell is worth considering is that it has a long-standing track record of paying healthy dividends.
With that said, the oil giant cut its dividend payment in Q2 2020 for the first time in three-quarters of a century. This was, of course, in response to the COV-19 impact on the wider oil industry. In fact, much like BP, Royal Dutch Shell shares took a major hit in early 2020.
Starting the year at 2,256p per share, the stocks are floating at just above the 1,300p-mark in July 2020. This represents a decline of over 42%. Going back to the firm’s dividend policy, although Q2 saw a cut of 66%, this still works out at a yield of 4.4% – which surpasses many shares listed on the FTSE.
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3. Exxon Mobil – 7.7% Dividend Yield Planned (NYSE)
Exxon Mobil is a US-based oil and gas organization with ventures globally. Led by Dareen Woods, the firm has a whopping market capitalization of $184 billion on the New York Stock Exchange.
Much like the other two oil shares we have discussed thus far, Exxon took a major hit in the first few months of 2020. But, its shares have since been moving in a more positive direction.
As such, had you bought Exxon Mobil shares in April 2020, as of July you would be looking at gains of 34%. But, the main attraction with Exxon Mobil is that CEO Woods recently came out to assure shareholders that the firm has no plans to cut its dividend objectives. This means that investors are on track to net a yield of 7.7% in the upcoming distribution.
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4. Tullow Oil – Trading at Just a Fraction of its All-Time High Price (LSE)
Tullow Oil is an Irish oil and gas company that is now headquartered in London. The organization has a global presence, and in 2019 it averaged production rates of just under 87,000 barrels of oil per day.
In terms of its stocks, we should note that this particular oil share is worth just a small fraction of its prior heights. This has nothing to do with the COV-19 oil crash per se, as Tullow was in dire straights long before the crisis.
For example, Tullow Oil shares last peaked in 2012 at a stock price of about 1,500p. At the time of writing in July 2020, those very same shares will cost you just 31p. This translates to a 5-year reduction of approximately 97%. On the flip side, if oil prices continue to recover throughout the remainder of 2020, Tullow Oil shares could see significant upside.
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5. Premier Oil – Potentially Undervalued With a High Earnings Yield (LSE)
Listed on the London Stock Exchange, Premier Oil is a UK oil and gas company with exposure to several domestic and international markets. With a market capitalization of just under £500 million, Premier Oil is a lot smaller than the other oil shares we have discussed thus far.
However, it could be an interesting selection nonetheless. At the forefront of this is a very attractive earnings yield. For those unaware, this particular accounting ratio looks at the firm’s operating profits in relation to its market value.
While analysts will typically view an earnings yield of 5% as healthy, Premier Oil is in and around the 15%-mark. As such, some market commentators argue that the stock is potentially undervalued.
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If you are here reading this guide because you want to gain exposure to oil as a commodity, you have plenty of options on the table. Sure, you can buy individual shares on a DIY basis, but some newbie investors will look at alternative avenues. At the forefront of this is an oil shares ETF or a CFD instrument. Let’s find out more about how to invest in oil shares through these methods.
ETFs (Exchange-Traded Funds) are financial instruments that are tasked with tracking a group of assets. In the case of oil, the ETF provider in question will look to buy and sell oil shares on behalf of investors. This means that once you make an investment, you won’t be required to do anything else. Your investment will likely still be tied to the wider market value of oil.
However, you will be able to diversify across heaps of companies – as opposed to being over-exposed to just a few. For example, just because the price of oil is on the up, this doesn’t mean that the value of BP shares will increase at the same rate.
After all, there are several internal factors that will play a part in determining the market value of its shares. As such, by holding an ETF that contains dozens of oil shares, you will stand a much better chance of staying in line with global prices, although there is still no guarantee of profit.
- iShares Global Energy ETF (IXC): One such example of an oil shares ETF is that of the iShares Global Energy ETF (IXC). The ETF is tasked with tracking the largest energy sector companies globally, including that of oil and gas. Its biggest holdings include Total SA, Exxon Mobil, and Chevron.
- Energy Select Sector SPDR Fund (XLE): Launched in 1998, this particular ETF is one of the oldest in the energy sector. With more than $8 billion in assets under management, it is also one of the largest. The vast bulk of oil shares in its basket are US-based. Naturally, this includes the likes of Exxon Mobil, Chevron, and ConocoPhillips.
The other option that you have at your disposal is to utilize CFDs (contracts-for-differences). As CFDs are tasked with mirroring the real-world price of an asset, you will simply be speculating on the future direction of oil. In most cases, your chosen CFD broker will tie its prices to that of the Brent Crude benchmark.
- If the price of the oil goes up and you have a buy position in the market, the value of your CFD trade will increase.
- Similarly, if you have sell position active, and the market value of the asset goes down, the value of your trade will also increase.
Although more suited for experienced traders, oil CFDs allow you to apply leverage. In fact, as per ESMA regulations, UK brokers will often offer you leverage of up to 1:10, meaning that you only need to put up a margin of 10% to enter the trade. However, this means there’s the risk of losing more money than without leverage.
Here are reviews of popular UK stock brokers that offer oil shares.
eToro is a hugely popular UK broker when it comes to buying oil shares. This FCA-regulated broker offers over 800 shares, which you can buy or trade as CFDs. This includes some of the best oil shares, as eToro allows you to invest in a number of the largest oil and gas firms in the space, as well as the best oil ETFs.
Whether you opt for oil shares on a DIY basis or an oil-based ETF, eToro does not charge any dealing charges, nor will you need to pay an annual fee. This makes the broker one of the most competitive options in the UK trading scene.
eToro’s most well known features are its social and copy trading tools. This broker is known as a pioneer of social trading, allowing you to engage with any of its more than 12 million users! It even offers copy trading tools that allow you to copy the portfolios of other share investors. This is ideal for beginners looking to learn how to buy shares in oil, as you can learn from experienced traders.
The broker allows you to deposit funds with a debit/credit card, bank account, and e-wallets such as PayPal. Although account minimums start at $50, you can invest from just $50 (£40-ish) per trade. Other than the spread and a $5 withdrawal fee, the only other charge that you need to factor in is a 0.5% conversion fee. This is because your GBP deposit will be converted into USD.
- Allows you to buy shares without paying any commission or share dealing charges
- 800+ stocks to buy or trade as CFDs,
- Some of the most popular and well known oil stocks
- Social and copy trading
- Accepts PayPal
- Licensed by the FCA
- Not suitable for advanced traders that like to perform technical analysis
67% of retail investor accounts lose money when trading CFDs with this provider.
Unlike eToro, Plus500 does not allow you to purchase shares in the conventional sense. This is because the platform is a CFD provider. As we covered earlier, this means that you will be speculating on the future price of the asset the stock CFDs are tracking.
With thousands of financial instruments hosted by Plus500 across multiple asset classes, this gives you ample opportunities to speculate on oil. For example, if you want to trade stock CFDs on companies like Exxon and BP, you have the choice of both buy and sell orders. This comes with a leverage of up to 1:5 if you’re a UK retail trader.
Alternatively, you can also trade an oil CFD. This offers higher leverage limits of 1:10, and again, you can choose from a buy or sell position. Irrespective of what CFD instrument you decide to trade, the platform does not charge any commissions, and spreads are very competitive.
Plus500UK Ltd is authorized & regulated by the FCA, and its parent company is listed on the London Stock Exchange, so safety should be of no concern. You’ll need to meet a minimum deposit of £100, and debit/credit cards, bank accounts, and Paypal are supported.
- Commission-free and tight spreads
- Thousands of financial instruments across lots of markets
- Trade with leverage
- Accepts PayPal
- FCA regulated
- Mobile trading app
- CFDs only
- More suitable for experienced traders
72% of retail investors lose money trading CFDs with this provider.
3. IG – FCA Regulated UK Stockbroker With Competitive-Fees
IG is an online brokerage firm that offers three main investment classes – traditional shares, spread betting, and CFD trading. If you simply want to buy oil shares, you will pay a very competitive fee of just £8 per trade. B placing three or more trades in a 30-day window, you can get this down to just £3.
The broker offers more than 10,000 equities from heaps of UK and international markets, so you are sure to find an oil company that meets your requirements. Traditional ETFs are also supported. If you are considering a more supplicated investment, IG hosts oil firms via CFDs and spread betting facilities. This comes with the option of leverage, should you want it. You won’t pay any trading commissions if trading oil CFDs, so it’s just the spread you need to take into account.
A notable aspect of IG is that it offers multiple trading platforms. Like eToro and Plus500, this broker has its own proprietary platform, but it also supports MetaTrader 4 and ProRealTime, both of which provide access to a range of advanced trading tools.
IG is regulated by several bodies including the FCA. You can get started with a deposit of £250 and choose from a debit/credit card, e-wallets like PayPal, or bank wire.
- Trusted UK broker with a long-standing reputation
- Good value share dealing services
- Offers share dealing, CFDs, and spread betting
- Supports MT4 and ProRealTime
- Access to UK and international markets
- Great research department
- Minimum deposit of £250
- US stocks have a $15 minimum commission
There is no guarantee you will make money with this provider.
If you have made it this far, you should now have an overview of how oil shares work. If you are sure that you want to gain exposure to this somewhat volatile battleground, we are now going to walk you through the process of how to invest in stocks that provide exposure to oil
Step 1: Join a UK Stock Broker
The only way that you will be able to buy oil shares in the UK is to use an online stockbroker. By performing a quick Google search, you will be inundated with hundreds of such platforms that allow you to buy shares at the click of a button. With that said, this makes it difficult to know which broker to sign up with.
As such, we would suggest making some of the following considerations before taking the first step.
- Does the broker list oil shares?
- Does the broker only offer UK companies, or can you buy oil shares that listed overseas?
- Is the stockbroker regulated by the FCA?
- How much does the broker charge in share dealing fees?
- What trading tools and research resources does the broker offer?
- Does the broker have educational material?
- What payment methods does the broker support?
- What is the broker like in the customer service department?
Finding a stockbroker that meets your needs can be a cumbersome process. If you don’t have time to do this yourself, above you will find a selection of brokers that allow you to buy oil shares in the UK.
Step 2: Open an Account, Upload ID, and Deposit Funds
Once you have chosen a share dealing platform that you like the look of, you will then need to register an account. The account opening process remains largely the same across most UK stockbroker platform.
Open an Account
Head over to the broker home page and elect to sign up.
You will need to enter some personal information, such as your:
- Full Name
- Home Address
- Date of Birth
- National Insurance Number
- Email Address
- Phone Number
Verify Your Identity
You now need to get the KYC (Know Your Customer) process out of the way.
To do this, you will need to upload:
- A clear copy of your passport or driver’s license
- A recent copy of a bank account statement or utility bill (dated within the last three months)
Before you can buy some oil shares, you will need to fund your investment account.
UK brokers often support the following payment methods:
- Debit Card
- Credit Card
- UK Bank Transfer
Step 3: Make Your Investment
The final stage of the process requires you to buy your chosen oil shares. There are many oil companies to invest in at UK stock brokers, but imagine you want to invest in BP.
As such, we enter ‘BP’ into the search box and click on the result that loads up. Next, click on the ‘Trade’ button.
Then, you will be shown an order box. You need to enter the amount of money that you wish to invest in your chosen shares.
To complete your investment – click on the ‘Open Trade’ button.
Note: You will instead need to click on the ‘Set Order’ button if you attempt to buy the shares outside of market hours, as per the respective stock exchange you are looking to target.
As the most sought-after commodity in the world, it makes sense that you have heaps of oil shares to choose from. But, it is crucial that you first understand how the industry works, not least because global oil prices will have a major say in the value of your investment. Many would argue that now is a good time to enter the market, as some of the largest oil companies in the world are a country-mile away from their pre-COV-19 levels.