Different approaches to crude oil
As we saw in the last part of this series, WTI (West Texas Intermediate) crude oil futures remained flat last week. While retail investors don’t have easy access to the futures market, they can benefit from access to other safer, low-cost avenues to bet on WTI crude oil prices.
The first is energy commodity ETFs like the United States Oil Fund ETF (USO)—an ETF that tracks prompt WTI crude oil futures. Shares of USO trade on the NYSE like company stock. The fund fell 0.2% last week.
The second is an ETF like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). It holds many US energy companies that have exposure to oil prices due to their upstream—oil production—operations. Because of their indirect exposure to volatile oil prices, ETFs like XOP are typically a safer, more diversified option for more conservative investors. XOP fell only 0.1% last week.
Investors can also gain indirect exposure along with steady income by investing in MLP (master limited partnership) ETFs like the Alerian MLP ETF (AMLP). AMLP holds midstream MLP companies like Magellan Midstream Partners (MMP).
As you can see in the above graph, USO underperformed WTI crude oil futures in the later part of the week, after overperforming it initially. WTI gave higher returns compared to USO at the end of the week. It closed marginally higher for the week.
XOP was also overperforming WTI crude oil at the beginning of last week. Eventually, it closed at returns in between WTI crude oil and USO.
In the next part of this series, we’ll discuss trends in the WTI-Bent spread.