Three Ways to Benefit From Oil’s Volatility

Fossil fuel prices surged in 2021.  Thanks to low reserves and heightened demand against the backdrop of a recovering economy, energy was the best performing S&P 500 sector last year with a 53% total return (including dividends).  

Geopolitical tensions in Eastern Europe and the Middle East continue to threaten oil supplies in 2022, driving prices higher.  Amid all of this, and despite pressure from top consumers to raise production, OPEC+ is sticking to its conservative output plan, which has energy analysts believing that oil will remain profitable for some time.   

“Given how tight markets are, oil certainly can rally above $100, particularly if OPEC+ supply increases continue to lag behind their target, U.S. producers fail to respond, or if the Ukraine-Russia crisis worsens,” the Economist Intelligence Unit said.

Goldman Sachs head of energy research, Damien Courvalin, also said that $100 a barrel is in the cards when he predicted a new high in oil demand in 2022 and again in 2023, citing the recovery in airline travel as a driving factor.  

“We’ve already had record-high demand before this newest variant, and you’re adding higher jet demand, and the global economy is still growing,” Courvalin said in an energy outlook briefing with reporters on Friday. “You see how we will average a new record high in demand in 2022, and again, in 2023.”

Zooming in, if Courvalin is correct, prices should be supported by tightening supply in the months to come.  Goldman Sachs expects inventories to fall to their lowest level since 2000 by summer and OPEC+ reserves to decline to historically low levels, given the lack of drilling in core-OPEC and Russia struggling to ramp up production.

Whether you’re of the camp that sees oil prices going higher or you want to take advantage of oil’s wild volatility, there are several options when it comes to reaping energy rewards.  In this article, our team explains a few of the tactics the pros use, along with some recommendations on tickers to consider.

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Oil Futures

Buyers and sellers of oil futures establish a price that oil will trade at not today but someday in the future.  Because no one can predict what price oil will be trading at next month or next year, participants in the futures market are essentially buying and selling risk in the hopes of making money.  Wild swings in oil prices can produce substantial rewards for futures traders, but the level of risk involved is high in relation to other oil techniques.  

Oil futures settle monthly, while most other commodities settle only four times a year.  Beyond the two-year mark, oil futures settle semiannually with the latest available contract ten years out.  Though the oil futures market for 2032 exists, history shows that predicting prices that far out is a dangerous game.  Oil futures are volatile and often require a substantial initial investment.  

Oil ETFs

Another avenue for direct access to the oil market is an Oil ETF.  Oil ETFs differ from funds that offer exposure to a selection of oil stocks in that oil ETFs track the price of oil as a commodity. Oil ETFs offer exposure to the quick, dramatic swings of oil prices without having to navigate the complexities of investing in oil futures contracts.   Oil ETFs are a suitable choice for investors with a high tolerance for risk looking for a speculative play on oil prices. 

Over the past year, the top-performing oil ETF and our team’s pick for 2022 is the Invesco DB Oil Fund (DBO).  DBO offers exposure to changes in the price of crude oil by investing in futures contracts for West Texas Intermediate (WTI) light sweet crude. 

Invesco DB Oil Fund (DBO)

• Net Assets                        $434.59M
• YTD Daily Total Return      3.96%
• Yield                                   N/A
• Expense Ratio                    0.75%

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Oil and Gas Equities ETFs

Oil and gas ETFs offer diverse industry exposure through a basket of energy equities, diversifying risk.  Production, exploration, and operations present different opportunities and trends, so oil and gas ETF’s can diverge from oil markets, often when equity markets are trending sharply.  

The Invesco Dynamic Energy Exploration & Production ETF (PXE) is a multi-cap blended fund that tracks the Dynamic Energy Exploration & Production Intellidex Index. The index is composed of 30 U.S. companies involved in the exploration and production of natural resources used to produce energy, selected based on factors including price momentum, earnings momentum, quality, management action, and value.

The top holdings include Continental Resources Inc. (CLR), ConocoPhillips (COP), and Pioneer Natural Resources Co. (PDX) are energy companies engaged in the exploration and production of natural gas and related products.

The Invesco Dynamic Energy Exploration & Production ETF (PXE) 

• Net Assets                        $132.34M
• YTD Daily Total Return      11.21%
• Yield                                   2.16%
• Expense Ratio                    0.63%