Company / Analytics

Analytics, 27 May 2022

Investing in oil and gas markets through Oil ETFs

The energy sector is going through one of its best-performing time in recent years. While the S&P 500 index has lost about 16% year-to-date, the Energy Index in the S&P sector is up 55%. Two major factors have contributed to this upside: the reopening of global economies after the pandemic leading to an inevitable recovery from the covid-induced downtrend and the impacts of Russia-Ukraine crisis. The EU’s decision to ban all imports of Russian oil by the end of the year, have also contributed to the upsurge in all prices.

Oil prices have a history of quick and dramatic swings. But one way to capitalize on returns provided by upsurge in oil prices is to trade through oil-energy ETFs. Oil ETFs offer traders the opportunity to trade oil without going through the complexities of oil futures contracts. Oil-energy ETFs have outperformed the broader market, with various leveraged ETFs going over 80% YTD. No doubt investors have flooded oil ETFs, elevating oil volatility.

How is oil and gas trading this year?

Players in oil and gas have, in recent months, had something to smile about for the first time since 2014, with oil seeing a huge surge in price as the US and EU continue to work at blocking Russia’s oil from the world. The consequential rise in demand has made it lucrative investing in the oil markets. Despite most stocks going through a bear market this year, Crude Oil WTI, a main global oil benchmark, has seen a +50.23% YTD change. The energy sector in general has gone up 55%. However, with increasing demand and reducing supply, some analysts are predicting an economic recession, but the commodities price is expected to keep going up.

Understanding Oil and Energy ETFs

An oil ETF (exchange-traded fund) can work by tracking the price of oil as a commodity, just as mutual funds. However, they’re different in that ETFs are traded like common stock on an exchange. The traditional mode of investing in oil involved investing in funds that own a portfolio in oil stocks or company that is involved in the oil and gas industry. Since oil ETFs don’t use futures contracts, a physical inventory is not a concern. This gives investors an opportunity to trade the oil markets without the hassle of tracking single energy-related stocks. Oil ETF markets therefore have higher daily liquidity, with high price fluctuations experienced throughout the day. Another advantage in trading ETFs is lower fees, which plays a huge role in inviting individual investors.

Challenges with investing in oil ETFs

While oil ETFs try to track their particular index as accurately as possible, it is very common for small performance discrepancies to be experienced over short time frames between the oil index being tracked and the ETF’s price. This accounts for the higher volatility in oil ETF market. Global market conditions are also very unpredictable in current times, with the US having banned Russian oil imports and the EU planning to follow suit. Russia exports about a two-fifths of all its oil to the EU, and was the largest supplier of oil products to Europe. The ban could further affect the price negatively resulting to very unpredictable oil markets swings. The market conditions therefore seem to attract more day-traders rather than long term investors.

Leading Oil ETFs to consider

United States Brent Oil Fund (BNO)

BNO is structured as commodity pool that combines investors fund to trade the futures and commodities markets as a private investment. BNO’s spot price is measured by movements in the price of the BNO’s benchmark oil futures contract.

Technical analysis

United States Brent Oil Fund (BNO)

BNO is structured as commodity pool that combines investors fund to trade the futures and commodities markets as a private investment. BNO’s spot price is measured by movements in the price of the BNO’s benchmark oil futures contract.

Technical analysis

iPath Pure Beta Crude Oil ETN (OIL)

OIL is structured as an exchange-traded note (ETN), which is an unsecured debt security that trades like a stock. OIL targets the Barclays WTI Crude Oil Pure Beta TR Index.

Technical analysis

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