Jenny Lowe outlines the options for those investors looking to get exposure to oil.

Twelve months ago, oil was trading at around US$140 a barrel, and those investors that had invested in the commodity for the previous six months would have seen returns of around 35 per cent.

However, since oil hit these record levels the price has fluctuated wildly, settling at around $70 per barrel today. This has left many investors wondering whether there is still money to be made in oil.

A volatile time
BlackRock’s vice chairman and global chief investment officer, Bob Doll points out that, ‘As the economy has shown signs of renewed life, many financial markets have been improving, a trend particularly evident in the case of oil prices. Oil nearly doubled over the course of May and into June, as prices approached the $70 a barrel mark.

‘This recovery in oil prices is not surprising, but the pace of the acceleration is. Demand levels have begun to
creep back up as emerging economies, particularly China, have got back on their feet and fear of a global depression has receded.’

According to Doll, oil’s equilibrium price point is probably in the $60 to $80 range. ‘Oil’s rapid run-up may result in some consolidation and profit-taking, but over the longer term we expect that oil prices will remain relatively elevated as the global economy continues to improve,’ he suggests. ‘At this point, we do not believe higher energy prices represent a significant drag to the global economy, though this factor bears close watching.’

Getting involved
When it comes to getting exposure to oil within a portfolio, there are a number of ways to go about it. The most obvious would be to invest directly in a company within the oil industry, such as Shell or BP. However, you must remember that, in doing this, you are subject not only to the fluctuating commodity price, but also to what is happening ‘behind the scenes’ within the company and in the economy, and these could also have an impact on the share price.

Another route to consider, and one that has become increasingly popular among UK investors, would be to use an exchange-traded fund (ETF) or exchange-traded commodity (ETC) that is focused on oil. These products basically track the performance of an index and can be traded daily by investors free of stamp duty. There are numerous providers of these vehicles, including dbx-trackers, Lyxor and iShares, all of which offer products that track the oil price.

ETF Securities, which specialises in ETCs, offers many options for investors such as the ability to go short or long on the oil price. So, for example, if you thought the oil price was going to increase, then you could opt for the ETFS Leveraged Crude Oil, which offers +2 per cent on the oil price. This means that the product will beat the oil price by two per cent when it is rising, but fall by an extra two per cent if the oil price should drop.

Diversified funds
The third option that investors have is to gain exposure to oil via investment funds. There are many options here depending on how much exposure you want to have. There are lots of funds that have a small weighting in oil and other commodities, and this is not always obvious from their names or strategies – the Invesco Perpetual High Income fund is a case in point – alongside more specialist vehicles such as BlackRock’s World Energy fund.

However, for those who want to take a bit more risk, there are more oil-specific options. Take, for example, the Junior Oil Trust. This invests in small and medium-sized oil and gas companies that have growth potential or are more likely to be on the acquisition radar of a larger mining company.