By Jared Cummans
Crude oil has been in the limelight in recent weeks, as its priced surged from a low of $75 barrel to break through the century mark, marking an increase of over 35%. While oil has long been, arguably, the most popular commodity on the market, investors and traders alike are looking to hop in on the action as crude presents itself with a wealth of opportunities. Though most people simply think of gasoline when they hear the term crude oil, this fossil fuel is actually a vital part of our everyday lives. Crude oil is utilized in everything from the production of plastics and fertilizers, to cosmetics and industrial solvents [see also Crude Oil On Fire: Examining The Commodity’s Rise].
As an investment, there are a wide variety of options to play this fuel and its volatility has attracted many over the years. Ever since the recession when oil topped $140/barrel, analysts and experts have been trying to figure out where a peak lies, and where oil is headed next. Many feel that peak oil production across the board will lead to crude permanently settling above $100/barrel, and never see double digits again. Still others think that innovation and unexplored reserves will lead to a long and fruitful life for crude. The truth likely falls somewhere in between. But no matter which side of the argument you fall on, there is no denying crude’s importance as a commodity and an investment, after all, our lives as we know it could not exist without crude [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
In an effort to educate investors of all kinds one the various ways to invest in crude oil, we outline 25 options to add exposure to your portfolio. Investments will span from those that are only meant for active traders, to those that can be held in a retirement portfolio, all of which make a play on this vital energy source [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].
Futures were the original method for obtaining exposure to commodities. These contracts can be difficult to understand and require a rather complex futures account, so they are not meant for the average investor. For those who fully understand the nuances of these contracts, futures can be one of the most powerful trading tools for an investor, as they offer exposure that, in some cases, can be found nowhere else in the market. The following futures contracts are offered on the NYMEX at the CME Group:
1. Light Sweet Crude Oil (CL): These futures track WTI crude and are quoted in U.S. dollars and cents per barrel. Each contract represents 1,000 barrels, are optionable, and currently extend exposure to 2020.
2. Brent Crude (BZ): While not nearly as popular as the WTI futures, Brent offers a different kind of exposure to crude. These contracts, which are also optionable, represent 1,000 barrels and also extend futures to 2020.
3. E-mini Crude Oil (QM): These futures, which offer exposure to WTI crude, represent 500 barrels per contract. This allows for smaller investors to still make a play on crude without having to shell out the hefty assets required for CL contracts.
4. Crude Oil Volatility Index (CVF): These VIX-based contracts will offer exposure to the volatility exhibited in crude oil prices. The contracts are a bit tricky and should only be used by those who can confidently invest, but they can be a powerful tool for making a play on crude’s high volatility.
5. RBOB Gasoline (RB): Rather than investing in unrefined crude oil, these contract specifically invest in RBOB gasoline, which is simply the gas you get at the pump. Some consider these contracts a better play on the consumer sector, as crude and gasoline prices do not always align.
Investing the equity side of the equation isn’t a pure play on crude oil, but it can make for a number of interesting opportunities that other investment vehicles simply don’t offer. Equities that focus on this commodity will most often consist of exploration, pipeline, or refining companies which can offer a number of advantages over other options. A fair amount of these companies offer strong dividend options and high liquidity for traders of all kinds:
6. Exxon Mobil Corporation (XOM): The principle business of XOM, a Texas-based company, is the exploration and production of crude oil and natural gas. The company has hundreds of affiliates that operate internationally. XOM has one of the largest market caps listed on U.S. exchanges, currently at around $370 billion with a current dividend yield of 2.3%.
7. British Petroleum PLC (BP): Founded in 1889, this oil and gas company is headquartered in London but runs operations all over the world. The two segments the company operates in are the exploration and production and the refining and marketing of oil and natural gas. It is estimated the company produces around 3.8 million barrels of oil equivalent per day. The stock trades hands over 9.3 million times per day and pays a dividend of 3.9%.
8. Chevron Corporation (CVX): CVX is a multinational corporation that operates in more than 180 countries. It operates in all aspects of the oil, gas, and geothermal energy industry. The two segments of the company are broken up into Upstream and Downstream. The Upstream portion is responsible for the exploration, development, and production of crude as well as transportation through pipelines. The Downstream portion is responsible for refining crude and marketing of crude oil.
9. ConocoPhillips (COP): COP is another integrated energy company, meaning it is engaged in the exploration, production, transportation, marketing and sales of crude oil. The company was founded in 1875, headquarters in Houston, Texas. ConocoPhillips is ranked as the fifth largest private sector energy corporation in the world and pays out a dividend yield of 3.6%.
10. Royal Dutch Shell PLC (RDS-A): RDS is a fully integrated oil and gas company included as one of the six large oil and gas players. The vertically integrated company operates in all aspects of crude oil. RDS is estimated to produce 3.1 million barrels of oil equivalent per day.
11. Transocean Ltd. (RIG): The main segment of RIG is contracting drilling services for oil and gas wells. The company also participates in the exploration and production of oil and gas. The market cap of the company currently around $15 billion is significantly smaller than that of the major players in the oil and gas industry, but still represents a large cap play. Value investors will be particularly attracted by the robust yield of 7%.
12. Anadarko Petroleum Corporation (APC): Headquartered in Texas, APC is another large player in oil and gas exploration and production. As of December 31, 2010, the company held 2.4 billion barrels of oil equivalent of proved reserves.
13. Petrochina CO LTD (PTR): This oil and gas producer and seller operates in mainland China. The state owned corporation is China’s biggest oil producer and is split into four segments: exploration and production, refining and chemicals, marketing, and natural gas and pipeline.
14. Petroleo Brasileiro (PBR): Founded in 1953 in Rio de Janeiro, Brazil, PBR is involved in the exploration, production, development, and production of oil. This multinational energy corporation also owns oil refineries and oil tankers. The company is known for its deep and ultra-deep water oil production.
15. Halliburton Company (HAL): One of the biggest names in oil, this stock features a market cap of approximately $30.5 billion and an average daily volume nearing 19 million. Based in Houston, Halliburton has its hands in the global market for both crude oil and natural gas.
16. Apache Corporation (APA): Apache is best known for its exploration and production of crude in various locations around the world, including the Gulf of Mexico, Western Canada, and Egypt among others. The stock offers a dividend yield of about 0.60% and trades over 3.5 million shares each day.
Exchange Traded Funds (ETFs)
ETFs have been extremely effective for helping to spread commodities to a number of different investors. While it used to be that only futures traders were able to access asset class, ETFs have helped the average Joe gain exposure to something like gasoline futures in their portfolio with just one simple fund. When it comes to crude exposure, there are ETFs for nearly every segment of the market including producers, explorers, and futures:
17. United States Oil Fund (USO): This ETF tracks front-month WTI crude contracts. With over 41 million shares outstanding and well over $1.5 billion in assets, this is one of the more liquid ETF options on the market. Beware, however, as USO is known to exhibit some nasty contango and should be fully researched before investing.
18. United States Brent Oil Fund (BNO): This fund tracks futures for Brent oil, a heavier crude that is typically found in the North Atlantic. Though Brent accounts for nearly two-thrids of global oil trading, this fund does not have quite the popularity of its WTI counterpart.
19. Energy Select Sector SPDR (XLE): One of the most popular ETFs, XLE has roughly $7.2 billion in assets and allocates them to the who’s who of big oil. Exxon, Chevron, Schlumberger, and Anadarko all find their way into the top holdings of this product. Note, however, that it is a U.S.-focused fund and leaves out important companies like British Petroleum and Royal Dutch Shell.
20. United States 12 Month Oil Fund (USL): This fund tracks WTI with a twist; it aims to reflect the changes in percentage terms of the price of light, sweet crude oil, as measured by the changes in the average of the prices of 12 futures contracts on crude oil. The longer-dated exposure may help spread out risks while alleviating some contango issues.
21. WTI Crude Oil Fund (CRUD): This product, from Teucrium, tracks crude futures with the goal of nixing contango. To do this, CRUD avoids investing in front month futures, but instead spreads its exposure across the most liquid contracts of later maturities. Note that the fund charges a hefty 1.54% to do so.
22. S&P Global Energy Index Fund (IXC): This ETF is similar to XLE but instead offers exposure to the global oil industry, which may offer better diversification benefits for a portfolio. The fund has about 52% of its assets in the U.S. but still features exposure to countries like the U.K., Canada, and France.
23. DB Oil Fund (DBO): This fund tracks WTI futures and has a specially designed strategy that may change its roll process depending on current market situations; the methodology is designed to minimize the impact of contango and maximize and positive effects of backwardation.
24.United States Gasoline Fund LP (UGA): UGA will offer something of an indirect play on crude as it tracks futures contracts on RBOB gasoline, one of the main derivations of crude. Though it will be heavily affected by crude’s performance, UGA can have more of a unique makeup to it as gas prices do not always trend with crude.
25. SPDR S&P Oil & Gas Explor & Product (XOP): This ETF aims to invest in companies that are actively involved in the exploration and production of oil. Top holdings include big name firms like Brigham Exploration and GeoResources.
Shibo Liang contributed to this article.
Disclosure: Jared is long BP.