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Crude oil is stored

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On April 20, 2020, the seemingly unthinkable happened: Crude oil prices dropped below zero. Specifically, WTI May 2020 crude oil futures went negative, hitting a low price of -40.32 dollars per barrel.

Originally published in Luckbox magazine. Sign up for free at getluckbox.com/dailyfx

This is an amazing anomaly for crude oil occurred after a combination of steady declines and sharp declines when the world began battling the COVID-19 pandemic. Americans were disappointed to learn that they were not being paid to replenish gas supplies, but crude oil prices were slowly changing.

Starting in 2020 at $ 61, crude oil managed to recover somewhat by the end of the year, ending December at $ 48, a 21% decline for futures. Despite a significant recovery in crude oil prices, the impact on oil and gas reserves in 2020 has made the energy sector the worst in this year (see fully recovered). Exxon Mobil (XOM), the largest energy company S&P 500at the end of 2020, decreased by 36%, at some point the loss was 55%.

Long-term investors in the energy sector have licked their wounds and seen a much-needed rally in 2021. XLE, the SPDR S&P 500 energy sector ETF, gained 53% in 2021, making it the best sector in the index that year. The same is true until 2022, as energy is again a major sector in the S&P 500.

In fact, energy is the only industry with a positive impact. This is due to the consequences of Vladimir Putin’s invasion of Ukraine. Most stocks fell in 2022 due to fears of war, global supply cuts and plans by the Federal Reserve to raise interest rates during the year. The invasion of Ukraine raised oil prices in early March after steady growth in January and February. This has pushed stocks such as ExxonMobil, even higher. On March 8, Exxon reached an all-time high of $ 91.51.

Although discussions continue on the transition from fossil fuels to green energy, in the foreseeable future the country is likely to rely on oil and gas. At the same time, stocks of the oil industry have brought healthy profits over the past year and a half. Many of these stocks are now at their peak along with the price of oil, and investors may be hesitant to buy at these high prices.

However, if oil prices retreat to $ 60-70 a barrel, investors can expect another oil rally. But what if investors don’t want to invest in just one stock (not knowing which one to choose) and definitely don’t want to buy the future of oil?

As usual, there is an exchange-traded fund (ETF). As mentioned earlier, sector-specific ETFs are available, such as the S&P 500 Energy Sector ETF, which contains all the energy stocks in the S&P index. As shown in the figure (see many options), ExxonMobil is the largest holding company in the ETF energy sector.

Crude oil is stored

Investors looking for alternatives to the SPDR Energy Sector Fund may prefer the SPDR S&P Oil and Gas Exploration and Production ETF (XOP). This fund can attract investors due to the lower weight of its main components – no stock is more than 3% of the portfolio. However, it has lower dividend yields and higher expense ratios than a broader energy sector fund.

The third option, the VanEck Oil Services ETF (OIH), has a slightly different combination of stocks in its main components compared to the other two. Note that the three funds have a large amount of crossover with their reserves. In addition, all three funds exhibit current correlations with each other above 0.75, meaning they often move in the same direction.

The fourth ETF worth mentioning is the US Petroleum Fund (USO). This fund differs from others in that its portfolio consists of futures contracts rather than stocks. Managers of this oil fund buy futures contracts for different months, as shown in the table.

This gives investors a more direct path to the impact of oil, but there is a serious caveat. The U.S. oil fund is prone to a problem known as “dragging,” as a result of which the price may decrease over time.

Crude oil is stored

This occurs when fund managers need to advance their futures positions before they expire. They sell futures that expire and buy futures that expire later. Because later futures are cheaper than first-month futures, this phenomenon is not happening now. However, it will return when the oil market shifts.

Depending on the goals of investors, energy ETFs are likely to fit into their portfolios if they assume they want a discovery. Energy will continue to show volatility throughout 2022. Investors need to be vigilant. They must always exercise due diligence before moving on to any energy asset.

Originally published in Luckbox magazine. Sign up for free at getluckbox.com/dailyfx

James Blakeway, technical editor of Luckbox, is the CEO of Quiet Foundation, a subsidiary of tastytrade, a data-driven company that provides free investment analysis and trading ideas to self-employed investors. @jamesblakeway

Learn more at How to trade crude oil

https://www.dailyfx.com/forex/fundamental/article/special_report/2022/06/14/Crude-Oil-Perseveres.html

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