Mastering various ways to enter the crude oil market: from ETFs to oil stocks

Crude oil, as one of the most heavily traded commodities globally, occupies a central position in the international commodities market. Many investors seek to participate in crude oil investment through diversified channels. Currently, the main ways to enter include futures, funds, ETFs, oil stocks, and options. Among these, crude oil ETFs are favored by retail investors for their ease of operation, but investors also need to understand the advantages and disadvantages of each method. This article will explore the complete ecosystem of crude oil investment, covering the characteristics of different investment tools, product comparisons, and risk management strategies.

Comparison of Multiple Crude Oil Investment Channels

Beyond directly holding physical crude oil, investors face multiple options. Each approach has its own barriers, risks, and return characteristics.

Futures Trading: A High-Liquidity Traditional Choice

Crude oil futures are considered one of the most traded commodities besides spot trading, due to the fact that most individual investors cannot store and transport crude oil properly.

The most popular contracts on the market are mainly West Texas Intermediate (WTI) and Brent crude oil, along with high-sulfur crude and Dubai Sour futures traded on the Singapore Exchange. Crude oil futures offer high liquidity but are also highly susceptible to market volatility, making price prediction very challenging.

It is important to note that trading crude oil futures involves large contract sizes, resulting in relatively high investment thresholds, and are not suitable for small to medium investors.

Oil Stocks: Direct Participation Requiring In-Depth Research

By purchasing oil stocks, investors can directly participate in the growth of the energy industry. This approach requires investors to not only monitor global crude oil price trends but also conduct in-depth research into specific companies’ production potential, macro energy landscape, competitive advantages, and financial performance.

Major global oil producers include:

• Sinopec (the world’s largest refining company)
• ExxonMobil (USA)
• Royal Dutch Shell (UK-Netherlands, with over 40,000 gas stations worldwide)
• BP (UK, a pioneer in Middle Eastern oil development)
• TotalEnergies (France, with 900 subsidiaries covering the entire energy production sector)

By selecting stocks of these leading companies, investors can diversify the risk associated with the volatility of a single commodity price.

Options Trading: Flexible Instruments with an Insurance Concept

Options operate similarly to futures but offer greater flexibility. When market movements do not meet expectations, investors can choose not to exercise the contract, losing only the premium. This acts as an insurance policy for futures positions.

For example: Suppose the current oil price is $30/barrel, and you expect crude oil to rise above $40/barrel by June. If the premium is $0.1, you only need to pay $100 to buy an option. If in June the oil price reaches $45/barrel, exercising the option yields a profit of $4,900. Conversely, if the price moves in the opposite direction, you can choose to abandon the exercise, losing only the $100 premium.

Contract for Difference (CFD): Leverage and Flexibility Combined

CFDs are favored by many investors, especially those with smaller capital. Through margin and leverage mechanisms, traders can open large positions with relatively little capital, without actually purchasing crude oil.

For example, if a platform offers a 5% margin requirement, to open a $1,000 crude oil position, you only need to deposit $50 as initial margin. CFDs typically do not charge commissions but profit from the spread, and are not limited by standard futures lot sizes.

However, CFDs are inherently high-leverage products, which can significantly increase risk. Investors must set clear stop-loss and take-profit levels to avoid rapid losses.

Rise of Crude Oil ETFs: An Intermediary Investment Tool

What is a Crude Oil ETF?

Crude oil ETFs are exchange-traded funds that first appeared in 2005, rising alongside the global economic recovery at that time. Unlike directly purchasing physical crude oil, crude oil ETFs indirectly track crude oil futures prices or specific crude oil indices through financial derivatives such as futures, forward contracts, and swaps, thereby following crude oil price movements.

Trading of crude oil ETFs occurs on stock exchanges, with buying and selling methods identical to those of regular stocks, making them highly convenient. Leveraged and inverse ETFs also exist, allowing investors to multiply gains or losses by 2-3 times (most commonly 2x). The US market is the largest in the leveraged and inverse ETF space, with inverse ETFs moving opposite to the underlying index, providing more strategic options for investors.

Selected Crude Oil ETF Products in Taiwan

Yuanta S&P Oil ETF (00642U)

• Issuer: Yuanta Investment Trust
• Tracking Index: S&P GSCI Crude Oil Enhanced Excess Return
• Management Fee: 1.00% | Custodian Fee: 0.15%
• Latest Price: NT$14.87

Yuanta S&P Oil ETF is the only listed financial product in Taiwan directly related to crude oil, tracking crude oil futures prices to allow investors to participate in oil price fluctuations. Its index has a high correlation coefficient of 0.923 with spot crude oil prices, making it one of the most closely related products.

JKoBrent Oil Bull 2 (00715L)

• Issuer: JKo Asset Management
• Tracking Index: S&P Goldman Sachs Brent Oil Daily Return 2x ER Index
• Management Fee: 1% | Custodian Fee: 0.15%
• Latest Price: NT$11.79

JKo Brent Oil Bull 2 is Taiwan’s first leveraged ETF tracking the positive 2x performance of Brent crude oil futures, using ICE Brent crude futures as the underlying. It is an effective tool for investing and hedging in Brent crude oil.

US Stock Oil-Related ETFs Benchmark

Energy Select Sector SPDR Fund (XLE)

• Issuer: State Street SPDR
• Tracking Index: Major global integrated energy companies
• Management Fee: 0.13% | Annual Dividend Yield: 15.57%
• Assets Under Management: $8.3313 billion | Latest Price: $34.62

XLE consists of US oil stocks, with top holdings including Chevron, ExxonMobil, and ConocoPhillips, all leading global energy companies. It is the largest and most liquid energy ETF.

iShares Global Energy ETF (IXC)

• Issuer: iShares
• Tracking Index: Major global energy companies
• Management Fee: 0.46% | Annual Dividend Yield: 11.88%
• Assets Under Management: $690.8 million | Latest Price: $18.41

IXC tracks large oil stocks worldwide, including ExxonMobil, Chevron, and Total, providing a global exposure to the energy sector.

Global MLP and Energy Infrastructure ETF (MLPX)

• Issuer: Global X
• Tracking Index: Oil and natural gas pipeline companies (MLPs)
• Management Fee: 0.45% | Annual Dividend Yield: 10.1%
• Assets Under Management: $506 million | Latest Price: $7.59

MLPX focuses on midstream oil and natural gas companies, with top holdings including TC Energy, Enbridge, and Williams Companies, offering industry-specific income mechanisms.

Core Advantages of Investing in Crude Oil ETFs

Many institutional investors include crude oil ETFs in their asset allocations mainly because:

Operational Simplicity — Crude oil ETFs are traded on stock exchanges, bought and sold like stocks, without needing a separate futures account, making them very easy to operate.

Clear Risk Diversification — Compared to the high volatility of individual oil stocks, ETF investments help diversify risk. ETFs are more liquid than stocks, allowing multiple trades within a trading day to capture short-term opportunities.

Tax Optimization Potential — Capital gains tax on crude oil ETFs is only incurred upon sale, offering greater tax advantages compared to other funds.

Lower Cost — ETFs do not involve costs related to storing, insuring, or maintaining physical crude oil. Management fees are usually around 0.3%-0.4%, saving approximately 2-3% in costs compared to futures and individual stock investments.

Two-Way Trading Flexibility — Investors can go long or short ETFs, using limit orders and stop-loss strategies for risk management, enabling diverse strategies.

Relatively Lower Risk of Margin Calls — Crude oil ETFs retain some advantages of futures trading while avoiding the high leverage risks that can lead to margin calls, making them more accessible.

When choosing, prioritize large-scale issuers with strong institutional backing. These institutions have more comprehensive research systems, are more sensitive to crude oil market prices, and offer better capital security.

Risks Facing Crude Oil ETF Investments

Despite the convenience, crude oil ETFs also carry significant risks that cannot be ignored:

Price Volatility Difficult to Predict — International political events, geopolitical conflicts, and environmental policies can significantly impact oil prices, leading to high volatility. The negative oil prices during the 2020 pandemic period exemplify this.

Futures Market Trading is More Active — In terms of trading volume, crude oil futures far surpass ETFs, attracting large institutions and oil companies. ETF liquidity may be limited under extreme market conditions.

Higher Experience Requirements for Investors — Inexperienced investors unfamiliar with derivatives may face higher risks. Some crude oil ETFs track small and medium-sized shale gas companies, which tend to have lower competitiveness and are vulnerable to collapse in low oil price environments. Careful analysis of tracking targets is essential; blindly following trends is not advisable.

High Cost of Roll-Over — ETFs tracking crude oil futures need to periodically roll over contracts, which can be costly. Therefore, ETFs are not suitable for long-term holding, as this can erode capital.

Practical Methods for Crude Oil Investment Strategies

Building a Diversified Portfolio

Using crude oil ETFs, investors can construct various strategies similar to stock trading. For example, to hedge downside risk in crude oil exposure, one could sell crude oil ETFs; or, when holding multiple oil stocks long positions, use energy ETFs for hedging.

Advanced Use of Inverse ETFs

Buying inverse crude oil ETFs allows tracking the inverse of crude oil indices. For investors interested in shorting crude oil but limited by margin requirements, inverse ETFs provide an alternative. However, these tools carry very high risks; while they can hedge risks and profit during oil price declines, they can lead to significant losses if prices rebound. Proper risk assessment and cautious participation are essential.

Overall, crude oil ETFs serve as a bridge connecting the crude oil market with ordinary investors, combining some advantages of futures with the ease of stock trading. Investors must have a thorough understanding of the market to effectively utilize these tools for asset allocation.