How To Invest In Oil & Gas In Australia: A Beginner's Guide

Oil and gas are vital industries in the Australian energy sector, substantially impacting the country’s economy.

Despite huge volatility, these industries are bustling with opportunities for investors, particularly in today's market.

If you are interested in investing in the oil and gas sector, explore different forms of oil investing and get answers to some frequently asked questions.

If you still need a trading account to buy commodities, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply. It offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

1. About Oil And Gas Industries In Australia

Australia has a massive investment in the petroleum industry. The country produces oil from oil fields in its south-eastern and north-western regions.

The domestic oil industry is significant for bringing export earnings, economic activity, investment benefits, and employment. Australian oil producers are globally known for their expertise, innovations, and the use of geophysics software.

With an ever-growing population and the rising energy demand, the country projects a strong potential for production expansion and increasing petroleum exportation.

Several global companies invest in the Australian energy industry due to its geographical closeness to growth hubs in Asia, production capacity, strong regional demand, extensive reserves, considerable existing infrastructure, and robust investment certainty.

Australia also has a significant hydrocarbon resource base that indicates its extensive capacity to produce crude oil, natural liquid gas, and natural gas. Due to this, Australia is a great potential destination for overseas oil and gas investment companies.

Due to the above attributes, Australia has become a key player in global LNG output. The rise in global energy demand makes the country one of the most popular petroleum investment destinations worldwide.

2. Oil and Gas as a Tradable Asset 

Crude oil is the primary source of global energy production. It is needed for transportation, electricity generation, petroleum production, manufacturing, and more. 

It is available in two main types - WTI (West Texas Intermediate) and Brent crude. Oil producers remove crude oil from the ground (oil wells) and transport it to a refinery where it separates to form useable petroleum products.

Regarding oil investing, crude oil is a volatile and the most heavily traded commodity globally. The balance between current and future supply and demand drives the oil price. Investors speculate on its price through various financial instruments.

Several ASX oil companies have shown substantial market cap and favourable growth, making them a good inclusion in existing portfolios. 

Investors are inclined to buy ASX oil stocks due to rising prices, high demand, and higher economic activity. For these reasons, crude oil and natural gas have become sought-after commodities, experiencing a price spike.

3. Can You Invest In The Oil and Gas Industry?

Oil stocks are some of the riskiest investments in the market. If an oil well is a duster, you will lose your capital. However, these stocks can be highly lucrative with abundant gas or black gold.

If you want to invest in the oil and gas sector, follow the five rules to mitigate risk.

1. Assess the oil/gas price – market risk.

2. Choose oil companies with diversified assets, including onshore and offshore prospects, over those with one or two main exploration targets.

3. Check the company's finances, including cash reserves, debt, operational expenses, revenues, deals, and acquisition interests.

4. Reputation and experience of the board and the executive management team

5. Location (Closeness to infrastructure and markets as it will help cut down on shipping fees and improve its profitability

4. How Can You Invest In Oil And Gas?

You don’t need to relocate to areas with oil wells to invest in oil assets. Fortunately, several financial instruments allow investors to do so without physically owning oil. Most of them require you to have a brokerage account.

If you still need a trading account to buy commodities, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply.

Let us look at these investment methods one by one:

Oil Stocks

Several companies in Australia are engaged in the extraction and production of petroleum or crude oil. Some of these companies trade on the ASX. 

When investing in oil stocks, look for well-established companies with a history of paying dividends. Besides maximising your returns, they can also act as an inflation hedge.

Buying oil stocks is easy. You need to sign up with a reputed stock broker and buy shares through their trading platform like other stocks.

Oil Funds – Index Funds and ETFs

Choosing oil funds over individual oil stocks is advantageous.

They offer the perks of spreading your investment across different options, reducing risk, and providing steadier returns that mirror the average performance of the overall oil sector. These funds resemble a bundled package, encompassing several dependable oil stocks in a single investment.

However, investing in a broad index fund is more beneficial than investing in a specific oil fund. If the oil industry tanks, you may get poorer returns from an oil fund than a more diversified one.

Thus, if your portfolio comprises broad funds, including an oil index or ETF fund, it could help you further diversify your holdings.

Oil Futures

Futures are the market's most advanced and most actively traded financial instrument. Due to their high liquidity on the market, they are relatively riskier than stock-and fund-based investments.

Oil Futures are contracts where two parties agree to exchange a fixed amount of oil at a pre-determined price on a specified date.

When the oil price rises, the contract becomes more valuable, and the contract owner could sell it for a profit. The contract loses its value when it falls, and the owner sells it at a loss.

However, before investing in futures, one should remember that futures are highly volatile, and you can't predict how the oil price will fluctuate. Also, as they expire on a set date, you need to exercise them before expiry, or else they will become worthless.

Oil CFDs

Contracts for difference or CFDs are the easiest way to trade in the oil markets. WTI (West Texas Intermediate) and Brent Oil are the two most common investment instruments with CFDs.

It replicates the oil barrel price and enables traders to trade price movements of futures and options without being required to trade in physical oil or manage complicated oil contracts.

Several reputed stock brokers such as eToro, XM.com, AVA Trade, and Plus 500 CFD service allow you to invest in oil and gas CFDs in three primary ways:

• CFDs on WTI or Brent Oil

• Stocks and Shares

• ETFs

5. Future Outlook Of The Australian Oil And Gas Industry

The energy sector, supported by oil companies, expects substantial growth in the upcoming years. With high oil prices, many investors invest in these companies, leading to growth and industry development.

The higher revenue generation will help companies fund their exploration and production activities and boost their expansion and overall sector’s strength.

Furthermore, several top oil and gas companies invest in innovative technologies and technological advancements.

For example, Woodside Energy Group is investing in advanced equipment to improve its operational efficiency of oil and gas exploration and production capabilities and reduce its carbon footprint. Moreover, accessing inaccessible reserves is, in turn, boosting their oil equivalent production.

As the global economy recovers from coronavirus, oil companies are slowly gaining momentum. They are recuperating from adversely impacted operations due to lower crude oil prices.

The existing supply pressures are causing a surge in the global oil market that is expected to continue. 

(Past performance does not guarantee future results.)

6. How Much Money Do You Need To Invest In Oil?

Investing in oil is affordable. You can trade in oil stocks of several well-known companies for under $100 per share. Oil ETFs are another cheaper investment option that you can buy for $30 or less.

If you still need a trading account to buy commodities such as oil and gas, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply.

7. Are Oil Stocks Worth It?

Like any other commodity, oil price fluctuates a lot.

When the oil prices are high, commodities offer significant returns on investment in the form of capital appreciation and dividends. However, when the commodity price drops, it delivers less than average market returns.

At this point, when the economy prepares to rebound after a period of downturn due to the pandemic, the oil price is again set to rise. The current oil price is at its most attractive. However, the perfect entry into the market is difficult for experienced investors.

The following pros and cons will help you decide whether oil stocks are worth investment:

Benefits of Investing in Oil and Gas

• A simple, accessible, and versatile way to access the market 

• Ideal for both day traders and long-term investors

• High liquidity and volatility of oil stocks may yield high profits.

• Increasing oil demand, especially in the Northern Hemisphere, indicates a rise in oil share prices.

• Oil stocks act as an inflation hedge and help in portfolio diversification.

• Excellent potential for profits through capital gains and dividends.

• Successful integration of renewable sources into energy production makes them a sustainable long-term asset.

Is Oil a High-Risk Investment? 

Yes, it is due to the following challenges:

• Fluctuating oil and gas prices

• Legal and regulatory risks, notably the tightening of environmental rules 

• The global transition to cleaner energy production can be a long-term threat for oil companies. 

• Oil spills could negatively impact the industry’s reputation, revenue, and share price.

• Dividend cuts due to low commodity prices, low cash reserves, and revenues from a decline in sales 

• Supply and demand challenges that can impact crude prices

• Sensitive to economic disruptions and the condition of the global oil market 

• Large businesses engaged in oil refining may not benefit from higher oil prices, thereby reducing a company’s profit potential.   

Before investing in the oil and gas sector, consider your risk appetite and whether it aligns with its volatility. Understanding the industry landscape, the energy cycle, and the effect of price fluctuations will help you identify valuable oil-related assets.

Always seek independent financial advice before making any investment decisions. Investing comes with risk, and only some are making a return. Many people lose money when investing.

8. Are Oil and Gas Stocks a Good Investment?

Considering the global economy recovery post-pandemic and the strength of Australia’s oil and gas industry, the demand for oil and gas is projected to surge globally.

The possibility of an oil price hike makes ASX oil stocks an attractive option for investors in today’s economic conditions. Investors can expect oil stocks to play a vital role in meeting the global oil demand in the coming years.

When choosing the best ASX oil stocks, companies with substantial market cap and potential for promising growth can make an excellent choice for portfolio development.

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. This is not financial advice.

(Past performance does not guarantee future results.)

9. Should You Invest in Oil?

Investing in the oil sector implies putting your funds in an industry with inherent risks linked to oil and gas exploration, such as technical risks, market risks, and socio-political issues.

Short-term investors can find an opportunity if they are comfortable with regulatory risks. However, your returns depend on individual companies' plans to shift towards renewable energy sources in the longer term.

10. What Are The Most Popular Small-Cap Oil Companies on ASX?

Small-cap oil and gas companies tend to be more aggressive concerning production growth than large-cap producers.

So, you could expect larger returns from them in the long term, but they come with a lot of risk, and there is no guarantee for any returns.

Here are some ASX small-cap oil companies:
 

• Tap Oil (ASX: TAP)

• Lakes Oil (ASX: LKO)

• Key Petroleum (ASX: KEY)

• Fremont Petroleum Corporation (ASX: FPL)

• Pancontinental Oil & Gas (ASX: PCL)

• Elk Petroleum (ASX: ELK)

• Central Petroleum (ASX: CTP)

• Bass Oil (ASX: BAS)

• Carnarvon Petroleum (ASX: CVN)

• Kina Petroleum (ASX: KPL)

• American Patriot Oil & Gas (ASX: AOW)

• Horizon Oil (ASX: HZN)

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. This is not financial advice.

11. Frequently Asked Questions (FAQs)

What Is a Popular Way To Invest In Oil?

Compared to investing in individual oil stocks or futures, investing in an oil fund is usually safer and a good option for beginner investors.

Oil funds offer a good level of diversification that helps investors save against high volatility in oil share prices and offer returns close to the average oil sector.

What Stocks Go Up When Oil Goes Up?

When oil prices rise, oil companies make huge profits, and their valuation increase, which, in turn, cause oil stocks to go up.

However, not all oil and gas stocks have the same impact. Stocks of major energy companies that pay dividend yields observe the highest price hike.

How Do You Invest in Oil Stocks?

The stock market is among the simplest ways to get exposure to the oil and gas industry. You can buy and sell oil shares on the ASX with an online broker or financial advisor.

If you still need a trading account to buy commodities such as oil and gas, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees apply.

How To Invest In Oil ETFs?

Oil-focused ETFs are good options for those who want to profit from oil price movements but are not willing to take the risk of investing in individual companies. ETFs invest in the broader sector than respective companies, thus exposing investors to lesser risks.

Commodity-based oil ETFs enable investors to track and profit from the oil price movements. In contrast, industry-sector ETFs allow tracking oil companies' “stock price."

You can buy and sell ETFs on ASX, just like how you trade in stocks. There is only one ETF that tracks the oil price (OOO), but there are various commodity and resources sector ETFs that give oil exposure to investors:

Some of the most popular oil ETFs in Australia include:

• BetaShares Crude Oil Index ETF-Currency Hedged, Synthetic (OOO)

• SPDR S&P/ASX 200 Resource Fund (OZR)

• VanEck Vectors Australian Resources ETF (MVR)

• BetaShares Global Energy Companies ETF - Currency Hedged (FUEL)

• BetaShares S&P/ASX 200 Resources Sector ETF (QRE)

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. This is not financial advice.

(Past performance does not guarantee future results.)

How Do You Invest in Oil Futures?

The oil futures market lets investors speculate on future oil prices via derivatives contracts.

They are mostly traded via a commodities CFD broker, where you don’t trade in physical oil. Instead, you trade a contract that results in profit or loss based on the rise or fall in asset prices.

The two most widely traded oil futures markets are Brent crude futures (global benchmark) and West Texas Intermediate futures (US benchmark).

Before investing in Futures, know they are highly volatile and riskier than other oil investment options. The use of leverage amplifies both losses and profits, thereby making them inappropriate for experienced traders.

What Are Some Oil and Gas Stock Examples on ASX?

Below are some examples of ASX-listed oil and gas companies:

Woodside Energy Group (ASX: WDS)

It is the largest ASX oil and gas stock by market capitalisation and performs operations worldwide.

After its merger with the petroleum business of BHP Group Ltd (ASX: BHP) in 2022, Woodside's portfolio accounts for a whopping 5% of the global LNG supply.

Santos (ASX: STO)

After Woodside, Santos is the next Australian oil and gas producer that supplies its products to domestic and Asian markets. In alliance with SK E&S, the company develops sustainable energy solutions and carbon capture and storage projects in Australia.

Beach Energy (ASX: BPT)

Beach's is a significant gas producer that runs onshore and offshore operations across South Australia and New Zealand. The recent addition of two new wells projects an increase in production and output in the short term.

Ampol Ltd (ASX: ALD)

Ampol supplies the largest petrol and convenience store network in Australia. It leads in fuel transportation, refines, imports, and advertises lubricants and fuels. The company delivered a robust operational and financial performance while executing established growth strategies.

Is it Good To Invest In The Oil and Gas Industry?

Despite the gradual shift from fossil fuels, the oil industry remains an appealing option for investors.

As the global economy gains momentum after the pandemic recovery, oil is available at its most attractive price. 

Do Poeple Still Buy Oil Stocks?

Yes. Though the world is moving to greener and more sustainable energy sources, the oil and gas industry still plays a crucial role in firing up power stations, fueling vehicles, and warming homes.

It will take a long time to completely replace fossil fuels with renewable energy sources. In the meantime, the oil industry remains an attractive bet to investors.

Is it Profitable To Invest in Oil?

Yes and No. Both day traders and long-term investors can benefit from investing in the oil sector when the economy is growing. When more people want to buy oil, the price of oil goes up.

On the other hand, when the economy is shrinking, it is more risky to invest in oil. Overall, investment returns are never guaranteed, especially when investing in oil or gas. Investors should always seek independent financial advise before making any investment decisions. Investing carries risk.

Investing in oil stocks can be quite uncertain. There's potential to make substantial profits, but it also comes with the possibility of experiencing losses. When oil prices go up, oil companies make a lot of money but lose out on profits when prices go down.

This makes the industry attractive to investors who want higher rewards in the form of dividends when the economy is doing well.

So, investing in dividend-paying oil companies can help investors gain dual benefits in capital appreciation and dividend income.

Moreover, oil stocks also act as an inflation hedge and portfolio diversification. However, entering the stock at the right time when the oil is trading low and is set to bounce back is essential to reap these benefits.

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above information is for educational purposes.

How Do You Invest In Oil Wells?

You can invest in oil wells with a Direct Participation Program (DPP). It allows people to invest directly in crude oil exploration and production.

Benefits of Direct Participation Program for Investors:
 

• Tax benefits include tax deductions for examination and development costs. 

• A booming oil well can provide huge profits from the oil sale.

• Oil investments aren’t related to other asset types like bonds or stocks. Investment in oil wells can help diversify your portfolio.

• DPP investment provides a long-term and steady passive income. 

• As oil prices hike in proportion to the rise in inflation, oil investments can serve as a hedge and protect your portfolio from the adverse inflation effects.

• Being an inevitable energy source for several industries and nations, the demand for oil will remain consistent now and in the future.

Though investments in the DPP program can deliver larger returns, they should require more due diligence and assessment of risks that come with other forms of oil investments.

How Does The DPP (Direct Participation Program) Work?

Investors agree to buy some of an oil company's assets and working interest in a DPP.

They enjoy all the perks of purchasing a percentage of an oil firm without requiring expertise in the oil and gas space and being involved in its set-up and daily operations.

So, DPP is considered a passive investment and can give a financially lucrative experience to an investor.

Types of Direct Participation Program:

Here are some ways to invest in an oil well via a DPP program:
 

Exploratory Drilling

This DPP investment involves finding oil sources hidden under the earth’s surface. However, the method is uncertain and doesn't guarantee success, making the investment highly risky. However, if oil is found, investors can reap enormous profits.

Developmental Drilling

The investment method involves searching for oil in sites where production occurs. This method is more expensive than exploratory drilling and may reduce your resultant profits.

Working Interest

Here, stakeholders buy a percentage of an existing oil-producing well.

Rework Program

This method focuses on the regeneration of wells that have seen a decline in production and may be close to the completion of their lifecycle.

In general, stakeholders should consider a few fundamental factors before deciding whether to invest in oil wells:

• Oil Prices: If oil prices drop, the cost of oil extraction increases, which leads to profit reduction.

• Production Costs: Oil production costs depend on government regulations, exploration, and the well's size. Investors must consider manufacturing costs at the time of determining the viability of an investment.

• Environmental Concerns: Environmental regulations concerning oil drilling can increase oil production costs and lessen profits.

• Geology: The location of the oil well also impacts its profitability. If an oil well is located where its extraction is difficult, it affects the project's profitability.

• Operator Experience: An operator's expertise also affects a project's success.

Regardless of which DPP investment type you choose, investors should research companies that offer DPP oil well investing and conduct due diligence.

Companies with solid reputations, a robust record of success, and a clearly defined investment strategy are ideal for investment.

How Do You Buy Oil Barrels?

Trading crude oil barrels can help diversify your investment portfolio.

To buy crude oil barrels online, you need a brokerage account. Once the account is active, you can trade oil barrels online using options, commodity futures contracts, and exchange-traded funds.

If you still need a trading account to buy commodities such as oil and gas, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

As crude oil is highly leveraged, investors should assess their individual risk/reward tolerance before trading in oil barrels.

It is recommended to risk less of your investment capital when trading crude oil options. Crude oil exchange-traded funds (ETFs) will further help reduce investing risks. They limit your loss to the original buying price plus commission without requiring a margin account.

Also, due to high volatility in oil prices, you must monitor your trade and exit from it before the contract expires.

Which Oil Stock Pays The Highest Dividend?

Most oil companies have a consistent track record of higher-than-average dividend yields. The highest yield often comes from companies operating midstream transport, processing, and storing oil and gas.

However, if we narrow our focus to just the companies that produce oil, the list shrinks a bit, though you can still score some pretty attractive yields from oil-focused stocks:

Woodside Energy Group Ltd (ASX: WDS) is one of Australia's largest emitters of greenhouse gases. It is also the highest-yield dividend stock, with a recent dividend yield of 9.77%. The company pays a large percentage of its cash flow to fund its dividend.

12. Conclusion

Oil companies have the potential to generate profitable returns when the oil prices soar.

Despite the cost-effectiveness and increased prevalence of renewable energy, the rising demand for fuel and energy still makes oil and natural gas a lucrative asset.

However, investors looking to invest in this sector must know the underlying risks. Oil shares can be more volatile than the broader market, and price crashes within the industry can cause dividend reductions.

Also, exposure to legal and regulatory risks of oil spills makes it a risky investment.

If you still need a trading account to buy commodities such as oil and gas, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

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