Investing in oil ETFs: prospects and the best funds

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Is investing in oil worthwhile today or not? Is it better to do it with ETFs? Let’s try to understand it together, with a guide on oil trading.

oil ETFs

The negative trend in the price of oil has added greater interest to the possibilities of investing in this raw material. And even if black gold is certainly not a novelty in investments, attention to this resource has never been higher than at this time. In short, with oil prices at historic lows, one wonders licitly whether investing in oil today is convenient, and how it can be done effectively.

In article Oil: why these shock prices? I published an in-depth analysis of the situation that arose in April 2020, in the midst of a coronavirus emergency, and of future prospects, I now try to answer now classic questions such as how to invest in oil with ETFs? and should investing in oil now?

What are the best oil ETFs on the market?

ETFs for investing in oil are many and diverse. If we add to this the fact that through the trading platforms of modern brokers you can make investments in oil in all the main world markets, it follows that the opportunities are numerous.

Now, the best known ETF on oil, so much so that it can influence about a quarter of the exchanges on WTI (one of the two reference “parameters” of crude oil together with Brent), is the United States Oil Fund (US Oil or USO), which it was also probably a part of it to drive WTI prices down, as we observed a few days ago. USO is listed on the New York Stock Exchange.

The main oil ETFs listed on Europe are a WisdomTree ETF called BRND, and OILB, also from WisdomTree. Warning: these investment instruments are denominated in the same reference currency as oil, which is the dollar. Therefore, these are investment instruments that expose exchange rate risk for those who invest in euros. To invest in funds denominated directly in euros (therefore the risk of the Euro-dollar exchange rate is for those who invest in dollars), there are several oil ETFs, such as EBRT of WisdomTree or XTRC of XTrackers, of the DB group.

Is it worth investing in oil with ETFs?

In all honesty, after reading many different analyzes I would say that today it is not convenient to buy oil through ETF, even if the prices are very low on the historical series. In fact, ETFs operate on the futures market, which is based on the WTI, the american barrel, which is in great difficulty – analysts say and as it is quite easy to see on its own.

The spot oil price today is very low, while the futures oil price expiring in June is currently about ten dollars higher per barrel than the spot, incorporating the spot price and the one-month storage costs. If the spot price does not change, the futures price may drop rapidly towards the spot, given that the storage cost will drop over the month.

In short, those who invest today in an oil ETF could see the value of their investment drop dramatically. Unless – but we will have to wait for important news on the cuts in production levels by OPEC+, the United States and Canada – the spot price does not rise.

However, if investing now in oil ETf does not seem like a good advice, things can change if the terms are changed: “now” is one thing, in a few weeks or in a few months another (this article is based on data and analysis of April 20/24); moreover, investing in oil by trading or buying stocks is different than investing in oil ETFs.

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