Investing in oil shares

Energy shares, and in particular oil shares, have been on the rise in recent years. Partly due to the war in Ukraine and the current market conditions, oil prices have risen significantly. And companies that sell oil benefit from this increase. Are you interested in investing in oil? Here is how you can with DEGIRO.

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What is oil?

Also referred to as ‘black gold, oil is the most traded commodity on the market, and for the time being, our world economy is unable to run without it. Oil is found underground where deposits of plants and animals, such as plankton, have drifted to the sea bottom. These remnants are then covered with gravel, sand or clay. Eventually, oil forms from the high pressure and thermal heat of earth layers.

Countries with a lot of oil?

In countries where there is a lot of oil in the ground, there used to be a seabed. For example, conditions in the Middle East millions of years ago were perfect for the formation of oil fields. Consequently, the largest oil reserves are in that area. Other areas and countries with abundant oil reserves are Russia, Venezuela, the US and Nigeria.

Applications of oil

Oil is used for many things. For example, it is used to make fuel, lubricant, asphalt, plastic and much more. After crude oil is pumped out of the ground, it cannot be used immediately. The oil must first be processed in a refinery. There, unwanted components are removed from the oil. In total, there are more than a hundred different types of oil blends in the world. The location where oil is extracted determines what the mixture consists of. For example, the composition of oil from Saudi Arabia is different from oil from Texas. This also means that the refining process to turn crude oil into usable oil is sometimes slightly different.

Composition of oil

The composition of an oil blend often determines its usages. The most sought-after oil has a low density and contains little sulfur. So-called "light crude" refineries can extract more fuel. This also makes the best-known light crudes, West Texas Intermediate (WTI) and Brent, worth more than heavy crudes. Heavy oil is often used as fuel for ships or as a residue from which asphalt is made.

What is oil?

Also referred to as ‘black gold, oil is the most traded commodity on the market, and for the time being, our world economy is unable to run without it. Oil is found underground where deposits of plants and animals, such as plankton, have drifted to the sea bottom. These remnants are then covered with gravel, sand or clay. Eventually, oil forms from the high pressure and thermal heat of earth layers.

In countries where there is a lot of oil in the ground, there used to be a seabed. For example, conditions in the Middle East millions of years ago were perfect for the formation of oil fields. Consequently, the largest oil reserves are in that area. Other areas and countries with abundant oil reserves are Russia, Venezuela, the US and Nigeria.

Oil is used for many things. For example, it is used to make fuel, lubricant, asphalt, plastic and much more. After crude oil is pumped out of the ground, it cannot be used immediately. The oil must first be processed in a refinery. There, unwanted components are removed from the oil. In total, there are more than a hundred different types of oil blends in the world. The location where oil is extracted determines what the mixture consists of. For example, the composition of oil from Saudi Arabia is different from oil from Texas. This also means that the refining process to turn crude oil into usable oil is sometimes slightly different.

The composition of an oil blend often determines its usages. The most sought-after oil has a low density and contains little sulfur. So-called "light crude" refineries can extract more fuel. This also makes the best-known light crudes, West Texas Intermediate (WTI) and Brent, worth more than heavy crudes. Heavy oil is often used as fuel for ships or as a residue from which asphalt is made.

Reasons to invest in oil stocks

Oil stocks have seen a comeback in 2022 as the economy has recovered from Covid-19, inflation has increased, and the Russian invasion on Ukraine has made supply scarcer. The price of oil is high, meaning many oil companies are seeing high profits. Analysts expect it may take a while before oil prices fall (although you can never say for sure). If oil prices do indeed remain high, then investing in oil has the possibility to be a profitable investment.

The 5 most traded oil stocks and ETCs

Since investing in oil is popular, here are most traded oil-related investment products in 2022 via our platform:

Shell (GB00BP6MXD84) comes in on top as the most traded oil stock. Until January 2022, the company traded under the name Royal Dutch Shell. After the company left the Netherlands, the name was changed to SHELL PLC.

Shell has been loved by many investors for years because the company pays an attractive dividend. Since 1943, Shell has never skipped its dividend pay-out. Over the past year, the stock has risen substantially in value, and in the first quarter of 2022, Shell posted a net profit of $7.1 billion.

Shell operates within the entire chain of the oil industry. This includes the exploration, production, refining, transportation and distribution of the commodity. It also trades in oil that does not come from its own fields. The oil reserves that it exploits itself are spread all over the world. The company has projects on every continent (except Antarctica).

This exchange-traded commodity (ETC) (JE00BDD9Q840) is leveraged and follows the price of WTI Crude Oil. This is oil extracted in the US (mainly Texas). When the commodity price for WTI crude oil increases by 1%, the price of this ETC increases by 2% due to the leverage effect. This leverage also works in the other direction when the price of the commodity falls. For this reason, this investment product has high risk.

With a market capitalisation of around $18.5 billion, Marathon Oil (US5658491064) is a relatively small player in the global oil market. Yet this year, it is one of the most traded oil stocks at DEGIRO. Perhaps many investors choose this stock because the company extracts all its oil from oil fields in the US. Whereas Shell and BP have had to write off a lot of trading activity in Russia due to the war in Ukraine, Marathon Oil focuses entirely on oil from the US. The boycott of Russian oil is likely to increase demand for US oil.

The company called a profit of $1.02 per share for the first quarter of 2022, compared to expectations of $0.92 per share, and the value of the stock increased by more than 50% during the same time.

TotalEnergies (FR0000120271) is a French oil and gas company that, like Shell, operates within the entire oil industry chain. In May 2021, the company changed its name from Total SE to TotalEnergies SE. The company says it wants to invest more in green energy in the future and the new name suits that pursuit better.

In the first quarter of 2022, TotalEnergies saw its net profit grow by 32% compared to the previous quarter. The company made $9 billion in profit but had to write off $4.1 billion in loss due to investments in Russian projects. These write-offs caused its shares to fall by about 10% during the first quarter of 2022. But after the first quarter earnings came out, investors seemed to have found confidence in the company again.

Compared to WisdomTree's WTI Crude Oil ETC, this investment product (GB00B15KXV33) tracks the price of Brent oil. Brent oil refers to oil that comes from four fields in the North Sea: Brent, Forties, Oseberg and Ekofis. Brent is often used as a global benchmark for oil prices.

This ETC is composed of futures contracts in Brent Crude Oil. This means that WisdomTree buys futures contracts on the underlying value of Brent oil. If the price of Brent rises, the contracts are sold at a profit. If the commodity price falls, the contracts are sold at a loss. On the annual return of this ETC, WisdomTree charges a 0.49% management fee.

Investing in oil through DEGIRO

At DEGIRO there are several ways to invest in oil. We have a wide range of company shares from the oil industry. In addition, you can also invest in oil-related ETFs and ETCs. Some of these products can be found in our ETF Core Selection, for which commissions are on the house. Currency, external product and spread costs may apply. See the ETF Core Selection, conditions and Fair Use Policy here.

For advanced investors, it is possible to invest in oil through futures. At DEGIRO, you can invest in futures on a number of affiliated derivatives exchanges. You will find all the futures contracts we offer on our platform under the 'Products' tab when you choose 'Futures'.

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Investing involves risks. You can lose (a part of) your invested funds. We advise you to only invest in financial products which match your knowledge and experience. This is not investment advice.

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