• Skip to primary navigation
  • Skip to main content
Good Financial Cents®
Content is based on in-depth research & analysis. Opinions are our own. We may earn a commission when you click or make a purchase from links on our site. Learn more.
  • Make Money
    • Get Money Now
      • Ultimate Guide to Making Money
      • Need Money Now
      • Get Free Money Fast
      • Make Money Fast
      • Make $1K Per Month
      • Make $100 Per Day
    • Control Your Destiny
      • Self Employed Jobs
      • Make Money from Home
      • Hobbies That Make Money
      • How to Become a Freelance Writer
      • Small Business Ideas to Start
      • How to Become an Independent Contractor
      • Best Online Jobs
    • Passive Income
      • Passive Income Ideas
      • Multiple Streams of Income
      • Extra Income
      • Residual Income Ideas
      • Learn to Sell e-Books
      • Make Money on Facebook
      • Make Money on Tiktok
      • Best Online Survey Sites to Make Money
    • Explore More
      • Best Side Hustle Ideas
      • Make Money for Teens
      • Best Online Colleges
      • Best Jobs No College Degree
      • Become a Millionaire
      • Careers for the Future
  • Manage Money
    • Best Of
      • Budgeting Tools
      • Personal Finance Software
      • Best Cashback Cards
    • Company Reviews
      • Personal Capital vs Mint
      • Personal Capital Review
      • SmartAsset Review
    • Guides
      • Buy or Lease a Car
      • What is Liquid Net Worth?
      • Setting Financial Goals
      • How to Budget
      • Ways to Save Money
    • Explore More
      • How Much Car Can I Afford?
      • Best Auto Refinance Companies
  • Invest
    • Best Of
      • Best Short and Long-Term Investments
      • Best Low Risk Investments
      • Best Online Stock Brokers
      • Best Crypto Exchanges
      • Best Short Term Investments
      • Best Long Term Investments
      • Best Trading Platforms
      • Best Investment Apps
    • Company Reviews
      • Lending Club
      • Robinhood
      • M1 Finance
      • Ally
      • TD Ameritrade
      • Fundrise
      • Betterment
      • Etrade
      • Wealthfront
    • Guides
      • Investing for Beginners
      • Investing Small Amounts of Money
      • Investing in Real Estate
      • No Money Down Real Estate
      • Bonds vs Stocks
      • Peer to Peer Lending
      • Best Hedges Against Inflation
      • Safe Bitcoin Investing in 2023
    • Explore More
      • Bitcoin vs. Real Estate
      • Betterment vs Wealthfront
      • Investing for College Students
      • Stock Market Alternatives
    • By Investment Amount
      • How to Invest $100
      • How to Invest $1K
      • How to Invest $2k-$3k
      • How to Invest $5K
      • How to Invest $10K
      • How to Invest $15k
      • How to Invest $20K
      • How to Invest $30k
      • How to Invest $50K
      • How to Invest $100K
      • How to Invest $200K
      • How to Invest $500K
      • How to Invest $1M
  • Taxes
    • Best Of
      • Best Tax Relief Companies
      • Best Tax Software
    • Guides
      • Federal Income Tax Guide 2023
      • Taxes and Cryptocurrency
      • How to Do Your Own Taxes
      • How to Invest Your Tax Refund
      • Hiring a Professional Tax Preparer
      • Tax Tips for Freelancers
    • Company Reviews
      • TurboTax Review
      • H&R Block Review
      • Taxslayer
      • Tax Act
  • Insurance
    • Best Of
      • Best Life Insurance
      • Best Home Insurance
      • Best Auto Insurance
      • Cheap Term Life Insurance
      • Car Insurance For Young Adults
    • Guides
      • Term vs Whole Life
      • Different Types of Car Insurance
      • Average Cost of Car Insurance
    • Explore More
      • Life Insurance Over 50
      • Life Insurance Over 80
      • $1 Million Life Insurance
      • $2 Million Life Insurance
      • $3 Million Life Insurance
    • Company Reviews
      • Banner Life Insurance
      • Ladder Life Insurance
      • Health IQ
      • Haven Life
      • Policygenius
      • State Farm Auto Insurance Review
  • Retirement
    • Roth IRA
      • Best Places to Open a Roth IRA
      • Best Investments for Roth IRA
      • 7 Roth IRA Secrets
      • Roth IRA Conversion Guide
      • Roth IRA Rules
      • Roth IRA vs Roth 401k
      • Are Roth IRA Contributions Tax Deductible?
    • 401(k)
      • 401(k) Limits
      • 401(k) to Roth Rollover
      • Is 401(k) Enough for Retirement?
      • Maxed Out 401(k): What's next?
    • Traditional IRA
      • Traditional IRA Rules and Limits
      • Traditional IRA vs. 401(k)
      • Simple IRA Rules
      • SEP IRA Rules
      • How Much Do You Need to Start an IRA?
    • Explore More
      • SEP IRA vs. Roth IRA
      • 457 Plan for Successful Retirement
      • 401a Rollover Rules
      • How to Retire at 50
      • How to Retire at 55
  • Banking
    • Best Of
      • Best National Banks
      • Best High-Yield Savings Accounts
      • Best Checking Accounts
      • Best Savings Accounts
      • Best CD Rates
      • Best Money Market Accounts
    • Company Reviews
      • BBVA
      • Synchrony
      • Wells Fargo
    • Explore More
      • 9 Banking Alternatives for 2023
      • What is a Credit Union?
  • Home
    • Best Of
      • Best Mortgage Lenders
      • Best Mortgage Refinance Companies
      • Best Home Warranties
      • Best Homeowners Insurance
      • Best VA Loans
      • Best Mortgage Rates
      • Best Moving Companies
      • Best Home Security
    • Guides
      • Home Buying Checklist
      • Online Home Appraisal
      • How Much House Can I Afford?
      • First-time Homebuyer Programs
      • How to Get Approved for a Home Loan
      • Save Money When Building a House
      • How to Save for a Downpayment
      • When to Refinance Your Mortgage
    • Explore More
      • 15 vs. 30-year Mortgage
      • Home Warranty vs. Home Insurance
      • Veterans United Home Loan Review
      • Quicken Loans Review
      • HELOC vs Second Mortgage
      • DCU Mortgage Review
      • Costco Mortgage Program Review
      • USAA Mortgage Loan Review
  • Credit
    • Best Of
      • Best Credit Repair Companies
      • Best ID Theft Protection Services
      • Best Credit Report Options
      • Best Bad Credit Loans
    • Guides
      • How to Build Your Credit Score
      • How to Raise Your Credit Score in 5 Months
      • How to Dispute Your Credit Report
      • Hot to Remove Collections from Your Credit Reports
      • How Identity Theft Destroys Your Credit Score
    • Explore More
      • What is a Good Credit Score?
      • What is a Bad Credit Score?
  • Debt
    • Best Of
      • Best Debt Consolidation Loans
      • Best Personal Loans
      • Best Student Loans
      • Best Student Loan Refinance
    • Guides
      • What is Debt Consolidation?
      • How to Get Out of Debt
      • How to Get a Personal Loan Approved
      • How to Pay Off Student Loans Faster
      • Should I Consolidate My Debts?
      • Should I File for Bankruptcy?
    • Company Reviews
      • Credible
      • Sofi

How To Invest In Oil

https://www.goodfinancialcents.com/wp-content/uploads/2020/09/jolene2-scaled-e1601409822221-150x150.jpg
  • Written By:
    Jolene Latimer

    Jolene Latimer

    Jolene Latimer has her Master's in Specialized Journalism from the University of Southern California. She writes about personal finance, sports...

    Read More
  • Updated: January 13, 2022
  • 5 Min Read
  • Advertising Disclosure

    Advertising Disclosure

    GoodFinancialCents® has an advertising relationship with the companies included on this page. All of our content is based on objective analysis, and the opinions are our own. For more information, please check out our full disclaimer and complete list of partners.

Quality Verified THE GFC® PROMISE
shield check icon
Quality Verified

GoodFinancialCents® partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

shield check icon
Why You Can Trust GoodFinancialCents®

GoodFinancialCents® partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Investing in oil can have a major financial upside, which is why it’s a popular choice for many investors. But, it’s not without its risk, as the process can not only be complex but oil prices are prone to some volatility.

If you want to invest in oil, it’s important to do your research and find a method of investing that matches your risk tolerance. Here’s what to know about investing in oil and how to decide if this is the right investment vehicle for you. 

Why Invest in Oil?

Oil can be a volatile stock which is one of its disadvantages that scares some investors off. However, it has many upsides,too. 

Oil allows you to diversify your portfolio, which is highly recommended when creating a long-term investment strategy. Many oil stocks also pay dividends. For example, in the third quarter of 2020, Chevron stock yielded a dividend of $1.29 per share. 

Then, there’s the potential for tax write-offs. Oil investments present unique tax advantages in the United States. Through tax exemptions and offsets, oil investors can avoid taxes they’d otherwise have to pay if they invested in alternative industries. 

Despite this, oil isn’t the right investment for everyone. The volatile prices, high risk, environmental impact, and relatively high financial barrier to entry are some drawbacks to consider before jumping into an oil investment. 

ProsCons
Diversify your investmentsVolatile prices
Potentially obtain tax write-offsEnvironmental impact
Pays dividendsHigh cost of entry

How to Invest in Oil

There are several ways to get started investing in oil. When you’re evaluating your options, be sure to assess the risk level of each, to make sure it matches your own risk tolerance. Also, if you have any specific tax needs you’ll want to consider the tax advantages of certain investments and whether these can benefit you. 

Master Limited Partnerships (MLPs)

MLPs, which are most often found in the energy industry, are entities that will typically provide or oversee the supplies, materials or staff needed for other businesses in the energy industry to operate. 

Think of companies that provide services to the oilfield, transport pipelines, or help oil companies coordinate their operations. They’re structured as partnerships, not corporations, for tax purposes. This means they pay tax at what’s often a much lower rate.

MLPs are relatively low-risk, making them a popular choice for those who take a long-term approach to investing, or for estate planning purposes. 

Exchange-Traded Funds (ETFs)

Want to diversify your portfolio by adding oil, but aren’t prepared to buy oil itself? ETFs offer an alternative, and potentially less costly, method to integrate oil into your investment strategy. Since ETFs are essentially pre-packaged, you don’t have to make multiple purchases in oil stocks to round out your oil exposure. 

Having one transaction also helps reduce the fees or commissions you’ll pay. If you’re trying to invest a small amount of money, oil ETFs could be the way to go. 

You can trade ETFs just like you would any stock in your portfolio, so you don’t need a broker-dealer to help. This gives you greater control and makes overseeing your own portfolio easier. Plus, with oil ETFs, you don’t incur capital gains tax until the fund is sold. 

Think you want to add oil ETFs to your portfolio? Conduct thorough research first by paying attention to the price of oil. Target specific ETFs and note their behavior as oil rises and falls. When you have an understanding of how each ETF you’re looking at reacts to marketplace changes, you can make your oil purchase based on your projections.

Oil Futures

Oil futures might be a good fit, if you want an investment that’s more directly in line with the crude oil market. Futures are a type of financial contract that stipulates a transaction will take place at a set time, date and for a certain price. You can buy futures in many industries, including oil. When it comes to crude oil futures, the contracts specify how much crude oil will be sold on a certain date and at what price.

Futures contracts cover 1,000 barrels at a time. When you take part in purchasing futures, it’s not expected that you’re going to one day be the owner of a barrel of oil. You purchase futures through a commodities exchange, selling before the expiration date on the contract. 

Even a small change in oil prices can have a relatively big impact on your payout — if oil is at $45 a barrel and rises to $46 when you sell, that’s a $1,000 increase for just one futures contract.

Keep in mind, you’ll need a margins account to trade futures. Usually your margins account needs a minimum balance so that you can pay any losses you might incur at the close of the contract. 

Direct Participation Program (DPP)

If you want to make a direct investment into activities like the exploration of oil you might want to consider a Direct Participation Program. These are long term, pooled investments that rely on passive management, meaning they aren’t traded. 

With a DPP, all of the members contribute their funds to be invested by the general partner. Whereas funding an exploratory drilling program might otherwise be only available to wealthy individuals, participating in a DPP let investors — who otherwise wouldn’t have access to a lot of capital — participate with full exposure to the risk or reward. 

In oil, there are several types of DPPs:

  • Exploratory drilling program
  • Developmental drilling program
  • Working interest program
  • Rework program

Since DPPs are often incorporated as partnerships they enjoy tax benefits over corporations. However, DPPs aren’t publicly traded. This means you can’t simply purchase a position in one, like you would when buying a stock. 

You might also have to meet a certain income level or have a certain amount of assets to invest. Depending on the state, you might even need to be an accredited investor to participate in a DPP. This is because DPPs are not a liquid investment. Once you invest your money in a DPP, you’ll need to be prepared to leave it there for five to 10 years. 

Mutual Funds

Mutual funds take investments from many investors and use the collective total to secure assets, like stocks and bonds, related to the theme of the fund. They’re managed by professional mutual fund managers who research the market, and then either aggressively try to beat it or make safe investments that keep pace with the overall market. 

Although it can be hard to diversify your portfolio by yourself, especially if you have limited money to work with, participating in a mutual fund can help you achieve diversification. 

When it comes to oil, there aren’t specific oil mutual funds to invest in. Investors typically participate in mutual funds related to oil, such as energy funds or natural resource funds. Through choosing the most appropriate funds in these industries, you’ll get some exposure to oil.

The Bottom Line

Participating in oil — whether directly or indirectly — can be a smart way to diversify your portfolio. Keep in mind, while each investment vehicle gives you the opportunity to participate in the upside of the market, it also comes with risks. Make sure you understand your own appetite for risk when it comes to your money and choose your oil investments, accordingly. 

Facebook LinkedIn Twitter

About the Author

Jolene Latimer has her Master's in Specialized Journalism from the University of Southern California. She writes about personal finance, sports and marketing.


You Might Also Enjoy

What Happens When Your Bank is Seized by the FDIC?

What Happens When Your Bank is Seized by the FDIC?

How to Invest $200,000 and Generate a Solid Return

How to Invest $200,000 and Generate a Solid Return

Webull Review: Trade Crypto and Traditional Investments on the Same App

Webull Review: Trade Crypto and Traditional Investments on the Same App

How To Diversify Your Portfolio With Artwork In 2023

How To Diversify Your Portfolio With Artwork In 2023

10 Best Investment Companies in 2023

10 Best Investment Companies in 2023

The 8 Best Guaranteed Interest Investment Accounts for Your Money

The 8 Best Guaranteed Interest Investment Accounts for Your Money

Leave a Reply

Cancel reply

  • Make Money
  • Manage Money
  • Invest
  • Taxes
  • Insurance
  • Retirement
  • Banking
  • Home
  • Credit
  • Debt
  • About
  • Contact
  • Facebook LinkedIn Twitter

© 2023 Good Financial Cents®. All Rights Reserved. | Privacy Policy | Disclaimer

All written content on this site is for information purposes only. Opinions expressed herein are solely those of AWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

All third party trademarks, including logos and icons, referenced in this website, are the property of their respective owners. Unless otherwise indicated, the use of third party trademarks herein does not imply or indicate any relationship, sponsorship, or endorsement between Good Financial Cents® and the owners of those trademarks. Any reference in this website to third party trademarks is to identify the corresponding third party goods and/or services.