On 20 April 2020, price Crude oil Became negative for the first time in history. The brutal combination of global lockdowns and the reluctance of producers to reduce production has led to a shortage of storage capacity. The situation has become so bad that oil producers are willing to pay buyers to store more oil, hence negative prices.
Since then, crude oil prices have risen sharply over the past few months, crossing $ 60 a barrel on February 17.
In the investment world, often, price gains are too slow to notice, but setbacks are too quick to ignore. The story of oil prices from April 2020 is the same. Over the past 10 months, the price of oil has been steadily rising, largely unnoticed. Today, we are going to dive into how to get oil as an investment.
Unfortunately, direct oil exposure through Indian markets is difficult to obtain. Invest in energy funds such as ONGC, Oil India or Reliance, as well as DSP Natural Resources Fund, which owns oil-producing businesses. Energy funds are not the best choice to invest in oil, as is their big exposure to non-oil companies such as renewable energy companies as well as coal and power companies.
Since there are no local options, you should shift your focus towards international markets. In global markets, we have many options through ETFs (Exchange-Traded Funds) to add oil-like commodity to our portfolio. In addition, international markets are no longer beyond the reach of the Indian investor. You can start investing internationally by opening a brokerage account in the US from India very easily. Furthermore, under the RBI’s Liberalized Remittance Scheme, an Indian resident can legally transfer up to 000 250,000 to invest internationally.
Now, coming back to oil ETFs, the three top oil ETFs you can look for in direct oil exposure are the United States 12 Month Oil Fund (USL), Invesco DB Oil Fund (DBO) and the United States Brent Oil Fund (BNO). However, before you immerse yourself in oil ETFs, there are a few things you need to know.
Oil ETFs are of a different nature compared to ordinary ETFs; They are designed with oil futures deals. Oil Futures Legal agreements to trade oil at a predetermined price at a specified time in the future. Since these ETFs are tracking oil futures and the oil futures contract in the ETFs has expired, the ETFs have to move the expired contracts to the next contract — there are costs associated with it. For this reason, these ETFs do not accurately track current oil prices. There is also the complex notion that these ETFs are suffering cantango (when oil futures prices are higher than the spot price), which makes them more inefficient in terms of properly tracking oil prices.
If you are looking for an easy alternative, you may find investing in IEO or even IEZ. IEO is the US Oil & Gas Exploration & Production ETF, while IEZ is the iShares US Oil Equipment & Services ETF. These two ETFs specifically invest in stocks of companies such as the oil and gas sectors such as Schlumberger and Halliburton. These ETFs provide a good way to indirectly expose oil to the commodity.
There are multiple ETFs in international markets to invest in oil. If you want to track oil prices directly, oil ETFs are a good choice, but the underlying device that contains ETFs is oil futures so they have drawbacks. See Indirect exposure to oil by sector ETFs.
Viram Shah CEO, Waste Finance.