Investors have numerous strategies to speculate on the direction of crude oil prices. Crude Oil Futures and options, exchange-traded derivatives, energy equities, and sector mutual funds are among the available possibilities.

Each of these options carries unique risks, and all include exposure to one of the world’s most volatile commodities. All can be acquired through an Internet brokerage account or a full-service broker.

The Key takeaways

• Crude oil is a volatile commodity required for worldwide transportation and industries.
• Investors can bet on crude prices by trading oil futures and options, related ETFs and ETNs, and energy equities, either directly or through ETFs and mutual funds.
• Commodity and midstream exchange-traded funds are prone to tracking error, which means they may not produce the same return as the underlying index or crude oil prices.

Oil as an Asset

Oil is an economically critical resource since it provides the majority of energy for transportation and raw materials for production. It is the world’s most widely traded commodity.

Because Crude Oil is so important and the production process is time-consuming, both customers and suppliers are famously reluctant to alter use and output as prices rise or decrease.

That means oil prices must rise further to rebalance markets following disruptions such as a dip in demand caused by a pandemic or a supply stoppage caused by conflict or economic sanctions.

Oil prices are determined globally in many spot and futures markets for crude and associated products by market participants such as producers, consumers, short-term speculators, and long-term investors.

While energy prices are volatile, the markets that determine them are very liquid, and market players are generally well-informed. Traders without substantial experience should continue with caution.

Oil and gas companies may also employ volumetric production payments (VPPs) to boost cash flow and support pre-exports. VPPs allow owners to retain ownership while monetizing their field or proven orders.

Oil Futures, Options and Spot Markets

If you had big pockets and the storage facilities to handle a tanker shipment of 600,000 barrels or 25,000 barrels per month via pipeline, you could buy oil outright in the spot market.

For the most part, Crude Oil Futures or options on oil futures will be the more practical option. On the CME Globex futures exchange, one crude contract equals 1,000 barrels.

To trade futures using an online brokerage account, you must obtain a margin and pass a broker’s suitability screening, which is not a very difficult task these days.

The process normally entails filling out an online application and waiting a few days. Some brokerages require a minimum account balance before authorizing futures trading, while others do not. Fees will vary.

Alternatively, you could trade futures with the assistance of a full-service broker, usually a commodity trading adviser (CTA).

Some crude oil futures contracts involve cash settlement at expiration, while others demand the transfer of crude to a predetermined delivery point.

Crude oil producers and consumers utilize futures to hedge their production revenue and energy costs, respectively. Speculators seeking to profit from short-term price movements are less likely to accept delivery of the underlying commodity when a futures contract expires.

In April 2020, the price of the expiring May West Texas Intermediate crude oil futures fell to -$37 per barrel just before expiration, indicating that traders were ready to pay to avoid having to take delivery of crude with storage facilities full during the early stages of the COVID-19 pandemic.

Commodity ETFs and ETNs

In recent years, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) have emerged to provide crude oil exposure to ordinary investors who are unable or unable to trade commodities futures.

Crude oil ETFs invest in crude oil futures to track the performance of the underlying commodity index. Because crude oil futures are frequently in contango, commodities ETFs such as the United States Oil Fund (USO) must sometimes pay up to roll expired futures contracts into the following month, presenting one potential source of tracking error.

USO’s investing goal is to deliver an average daily return that is within 10% of the average daily return of the front-month contract for West Texas Intermediate crude oil over 30 days. In 2020, oil market disruptions and position limits imposed by future exchanges and the fund’s futures broker effectively prevented the fund from deploying investment inflows into front-month crude oil futures for a period.

While the fund has maintained to accomplish its investment goal by investing in both longer-dated oil futures and the front-month contract, it acknowledges heightened uncertainty about its ability to stay within the stated tracking error limit in the future.

In November 2021, USO agreed to pay a combined $2.5 million in penalties to the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to settle charges that it failed to disclose position restrictions imposed by its broker on time.

Because commodity ETFs sometimes have negative roll yields as futures contracts expire, they are only ideal for short-term speculation. As of March 1, 2022, oil prices were at seven-year highs of around $100 per barrel, and the USO’s price had fallen roughly 90% since its debut in 2006.

As of the same date, USO’s sister fund investing in crude oil futures expiring over the next year, the United States 12 Month Oil Fund (USL), has fallen 44% since its launch in 2007.

Invesco DB Oil Fund (DBO) is another commodity exchange-traded fund. It invests in crude oil futures for up to 13 months, using a mechanism that seeks to limit negative roll yields while maximizing positive ones.

As of March 1, 2022, DBO’s market value was $506.7 million, compared to USO’s $2.9 billion. Since its inception in 2007, DBO has returned a total of -2.6 percent.

Another advantage of commodities ETNs is that capital gains taxes are postponed until the position is liquidated, whereas gains from commodity ETFs are taxed annually regardless of whether they remain in the portfolio.

Commodity ETFs and ETNs may allow the issuer to redeem them under certain conditions.

Energy Stocks, Equity ETFs, and Mutual Funds

Investors can also get exposure to oil by buying related stocks directly or through energy-sector ETFs and mutual funds. While energy stocks carry their risks, ETFs and mutual funds provide diversification within the industry.

The Energy Select Sector SPDR Fund (XLE) is a top energy ETF that tracks energy equities in the S&P 500 index, a large-cap benchmark. With a market value of more than $36 billion as of March 1, 2022, XLE comprises the largest integrated oil firms in the United States. As of the same day, Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) accounted for more than 44% of XLE’s portfolio.

The iShares Global Energy ETF (IXC) provides exposure to the world’s major energy firms. In March 2022, Exxon and Chevron accounted for around 26% of the $2 billion fund’s portfolio, followed by Shell Plc. (SHEL), ConocoPhillips (COP), TotalEnergies (TTE), BP Plc (BP), and Enbridge Inc. (ENB).

ETFs that specialize in upstream US oil and gas producers include the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), and the Invesco Dynamic Energy Exploration & Production Portfolio (PXE). XOP is the only one of the three that excludes crude refineries.

The VanEck Vectors Oil Refiners ETF (CRAK) focuses solely on oil refiners in the United States and worldwide. The VanEck Vectors Oil Services ETF (OIH) tracks oilfield services and drilling rig providers, with Schlumberger NV (SLB), Halliburton Company (HAL), and Baker Hughes Company (BKR) accounting for 39% of the portfolio in total.

The JP Morgan Alerian MLP Index ETN (AMJ) is an exchange-traded note that tracks the largest U.S. energy pipeline operators, often known as the midstream sector. The ETRACS Alerian Midstream Energy Index ETN (AMNA), sponsored by UBS, is a comparable offering. Because the midstream sector comprises master limited partnerships, midstream ETFs (as opposed to ETNs) tend to underperform because they cannot benefit from certain MLP tax breaks.

Vanguard Energy Fund Investor Shares (VGENX) and Fidelity Select Energy (FSENX) are two of the largest energy-focused mutual funds.

There are several ways to invest in oil commodities. You may even purchase genuine oil by the barrel.

Crude oil is traded on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodity markets worldwide. Futures contracts are agreements to supply a certain quantity of a commodity at a specific price and date in the future.

Oil options are another way to purchase oil. Options contracts allow the buyer or seller to trade oil on a future date. If you want to buy oil futures or options directly, you must do it on a commodity market.

The average investor’s preferred method of investing in oil is to purchase shares of an oil ETF.

Finally, you might invest in oil indirectly by owning several oil companies.

You can trade a wide range of oil markets, including popular crude oils like WTI and Brent Crude, as well as no-lead gasoline and heating oil.

The easiest way to spot an opportunity is to keep a watch on breaking news and important price levels, using our suite of tools and resources:

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