Oil ETFs: Follow the oil price via a tracker
Due to the corona pandemic and other developments in the world, oil prices have made major movements. At the moment, prices have risen explosively after a low point that has not been seen in thirty years: from around 500% in 2021 to a more significant increase. In this blog you can read how, in this fluctuating market, these price movements can be successfully played in with the help of the oil ETF .
What are Oil ETFs?
Oil ETFs (exchange traded funds) are funds that make it easy to invest in oil and gas. These ETFs track the price of crude oil or shares in the largest oil and gas companies. Oil ETFs make it possible to invest in oil and other commodities without having to trade in futures .
Oil ETFs can be used to speculate on market price movements in an easy and accessible way. These funds allow investors to easily invest in several oil companies at once, instead of in individual oil company shares. Some ETFs also offer the opportunity to go short or use leverage.
Oil ETFs: How Do They Work?
An oil ETF works in the same way as a regular investment fund. The investment company invests in various securities, such as shares in an oil company, or buys oil directly via derivatives such as futures and options. Investors can then purchase this fund and indirectly trade in oil and gas. This offers investors the opportunity to expand their portfolio with commodities, without having to make many purchases themselves.
Oil-ETF’s versus ETC’s
There are two types of oil ETFs:
- Commodity ETFs
- Exchange Traded Commodity ETFs (ETCs)
Both types of funds track the price, but use different methods to closely monitor these prices.
Commodity ETFs track the price of an index fund. One of the most widely used ETFs is the “SPDR® S&P Oil & Gas Exploration & Production ETF”. This fund tracks the prices of oil and gas companies in the US. They therefore have shares in these companies. There are also ETFs that use futures and/or bonds to track the prices of Brent oil or WTI.
ETCs work differently. They use a debt instrument, which allows them to closely track the price of one or more commodities. ETCs are therefore similar to exchange traded notes (ETNs).
Why invest in oil ETFs?
Why not invest in oil? Investing in oil can involve high risks. The main reason to invest in oil ETFs is that it is easier and has less risk than investing in oil futures .
The majority of crude oil is traded via futures. However, these securities are not only purchased by oil companies and investment companies, but also by speculators who try to make money without having the intention of physically receiving the oil. In this way, they can artificially manipulate the price.
Most futures exchanges have strict rules about who can trade there. These exchanges are therefore not accessible to retail traders. Trading in futures also involves several risks. In April 2020, traders briefly manipulated the price of oil contracts downwards: before the expiration of their contracts, they sold their futures to prevent the physical product (crude oil) from being delivered.
Other ways of oil trading
ETFs and futures are not the only ways to trade in commodities. Derivatives such as CFDs also offer the opportunity to trade directly in commodities, such as Brent oil, WTI and natural gas. You can also trade in shares, indices and foreign currencies. It is also possible to go short on oil prices by means of CFDs.
What moves the oil markets?
As with any financial instrument, the oil market is determined by supply and demand. An increase in supply without a decrease in demand pushes the price down. Conversely, an increase in supply or demand quickly pushes the price up.
Despite the rise of alternative energy sources, people are still heavily dependent on crude oil, both as a fuel and as a production material. When the economy is doing well, the demand for oil increases, while in times of recession, demand often decreases.
A small group of countries is responsible for the majority of the world’s oil supply. The Organization of the Petroleum Exporting Countries (OPEC) has a major influence on production levels. However, the two largest countries, Russia and the United States, are not members of OPEC. This can lead to price wars, which increases oil supply.
As you can imagine, this situation can cause volatility in oil prices. This means that risk management is always of great importance when investing in commodities.
Most Traded Oil Stocks in 2022
Below are some of the most traded oil ETFs in 2022.
- “United States Oil Fund LP ETF” – biedt toegang tot WTI Crude Oil
- “Lyxor STOXX Europe 600 Oil & Gas ICBE ETF” – provides access to European oil and gas companies
- “iShares Oil & Gas Exploration & Production UCITS ETF” – provides access to US oil and gas production companies
Oil ETFs Summarized
You can use oil ETFs to invest in the oil price or to invest in oil and gas companies in an accessible way. There are different types available, for example ETFs ETCs, futures and leveraged products. You can also go short on a number of products. Supply and demand for oil can fluctuate strongly, which often leads to fluctuations in the oil price. Good risk management is therefore of great importance.