Three Ways to Reap Rewards from Oil’s Volatility

The oil market has been volatile for weeks, and after plunging last week, crude futures have been steadily climbing in recent days due to uncertainty over current supply.  During Wednesday’s session Brent and U.S. West Texas Intermediate (WTI) crude futures each rose more than 5%.

Concerns about supply are evidenced in the market structure, where front-month prices are trading at a heavy premium to following months, as buyers scramble to secure supplies.

“I think you will see record backwardation and you will see $150 a barrel this summer,” Trafigura’s Ben Luckock said at the FT Commodities Global Summit.

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

---

---

Oil Futures

Buyers and sellers of oil futures establish a price that oil will trade at not today, but some day 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.  

Futures for oil 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 through 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. 

The top performing oil ETF over the past year 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%

---

---

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%

---

---