With recent volatile movements in crude oil prices, investors may wish to gain a better understanding of some available crude oil plays. The two most well-known blends are the West Texas Intermediate (WTI) and Brent crudes, and there are various ways to gain exposure, either in a basket or pure-play form. This report summarises the various instruments investors may wish to look at, such as oil futures, options, ETFs and oil related stocks. In it, we also provide more details of five ETFs that cater to the needs of different investors.
Crude oil futures
Crude oil futures are the world’s most actively traded energy product. WTI futures, based on the North American benchmark, trade on NYMEX (New York Mercantile Exchange), while Brent futures, based on the European benchmark, trade on ICE (Intercontinental Exchange).
This is the most direct way to gain exposure to oil, but investors have to open a futures trading account and maintain a daily margin. Investors also have to note the trading liquidity of the individual futures contract that they are buying.
Bearish investors of oil may look to short futures.
Crude oil options
Crude oil options is another way for investors to gain exposure to crude oil, but more detailed knowledge may be required, depending on the structure of the option. Unusual options may also be structured for more sophisticated investors.
Crude oil ETF or ETNs
There are a number of ETFs offering exposure to WTI, and the most popular is the United States Oil Fund , which invests mainly in near month contracts. As such, USO will maintain a high sensitivity to spot prices but may be subject to the adverse impact of contango over the long term due to rolling costs.
Investors should look out for the holdings of the ETF and how it is structured, as well as the expense fees of the fund. More actively managed funds in general have higher expense ratios.
Bearish investors of oil may look to buy inverse ETFs.
Crude oil related stocks
Finally, the stocks of oil producing companies is an indirect way to achieve exposure to crude oil. As the profitability of oil companies tends to move along with changes in oil prices, there is generally a positive correlation between stock prices and crude oil prices. Investors may consider investing in ETFs or the stocks directly.
During this recent oil price downturn, stocks of companies in the upstream segment of the oil and gas value chain have been the most hit. Midstream companies have fared better as their operations depend on the volume of oil transported (pipelines , etc.) rather than the price of oil. Downstream companies with crude oil as the feedstock have benefitted due to more favourable spreads.
Crude oil futures are the world’s most actively traded energy product. WTI futures, based on the North American benchmark, trade on NYMEX (New York Mercantile Exchange), while Brent futures, based on the European benchmark, trade on ICE (Intercontinental Exchange).
This is the most direct way to gain exposure to oil, but investors have to open a futures trading account and maintain a daily margin. Investors also have to note the trading liquidity of the individual futures contract that they are buying.
Bearish investors of oil may look to short futures.
Crude oil options
Crude oil options is another way for investors to gain exposure to crude oil, but more detailed knowledge may be required, depending on the structure of the option. Unusual options may also be structured for more sophisticated investors.
Crude oil ETF or ETNs
There are a number of ETFs offering exposure to WTI, and the most popular is the United States Oil Fund , which invests mainly in near month contracts. As such, USO will maintain a high sensitivity to spot prices but may be subject to the adverse impact of contango over the long term due to rolling costs.
Investors should look out for the holdings of the ETF and how it is structured, as well as the expense fees of the fund. More actively managed funds in general have higher expense ratios.
Bearish investors of oil may look to buy inverse ETFs.
Crude oil related stocks
Finally, the stocks of oil producing companies is an indirect way to achieve exposure to crude oil. As the profitability of oil companies tends to move along with changes in oil prices, there is generally a positive correlation between stock prices and crude oil prices. Investors may consider investing in ETFs or the stocks directly.
During this recent oil price downturn, stocks of companies in the upstream segment of the oil and gas value chain have been the most hit. Midstream companies have fared better as their operations depend on the volume of oil transported (pipelines , etc.) rather than the price of oil. Downstream companies with crude oil as the feedstock have benefitted due to more favourable spreads.
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