ETFs to Play Oil’s Wild Ride

Last Friday’s upbeat jobs report reinforced rate hike fears in time for the Fed’s upcoming policy later this month, which only added to the clouds of uncertainty looming over the already fragile oil market. The concern here is that an interest rate hike announcement come December 16th would serve as yet another tailwind for the stubbornly strong U.S. dollar, putting more downward price pressure on commodities like crude oil.

OPEC’s inaction to curb oil production, matched with U.S. dollar strength and lackluster global economic growth, hasn’t done much to help oil prices stabilize. To put Monday’s price plunge in perspective, consider the price of oil from 1995 to 2015 from Bloomberg:

Alas, “black gold” has long been plagued with volatility, and the recent collapse likely hasn’t surprised too many market historians.

Before examining the various exchange-traded options that offer exposure to oil prices, let’s consider how oil-related equities have fared since the broad market bottom seen during late August of this year.

Below is the returns comparison between various corners of the oil market, including: broad based Energy sector (XLE A), oil producers & explorers (XOP B+), oil services (OIH B+), and of course the price of oil as represented by (USO A). Note the specific time frame here, 8/24 – 12/7/2015, is meant to showcase returns as of the August lows, and what appeared to be the bottom for energy assets prior to Monday’s sell-off.

Key takeaways:

• Even after a prolonged sell-off since June of 2014, crude oil prices remain quite volatile, showing little prospects of bottoming out any time soon. For perspective, USO rebounded 27% in a matter of days following the August crash. It has since lost all that and then some, trading down 6% from its previous lows.

• The oil services group (OIH B+) remains in positive territory even after the latest oil futures sell-off. This isn’t terribly surprising, since the profitability of the service companies in the oil industry isn’t nearly as dependent as that of the producers & explorers (XOP B+), which happen to be the worst performers on the equity side.

Looking ahead from a purely technical perspective, we see that if oil-related equities were to follow in the footsteps of crude prices, as they have done for the last year, then it’s likely that energy names are in for another shakeout and lower lows, much to the bottom pickers’ frustration.

The last time Goldman Sachs predicted oil could sink as low as $20 a barrel in September of this year, everyone thought they were joking, since crude prices were on the rebound then. Fast forward to today and that forecast doesn’t seem as far-fetched.

It’s certainly possible for oil prices to stabilize at an unforeseen level and carve out a bottom that catches most of us off-guard. In fact, that’s probably how it will go down…eventually. For the time being however, it appears that fundamental risks and technical weakness are likely to continue paving the way for lower oil prices.

Investors have a multitude of options for gaining exposure to oil prices: they can either do so tangentially; via energy-focused equity ETFs; or more directly, via commodity-based ETPs. In addition to the few funds highlighted above, consider the following:

• Broad Energy ETFs

• Oil & Gas Exploration & Production ETFs

• Oil Equipment & Services ETFs

• Unconventional Oil & Gas ETFs

• Crude Oil ETPs

Oil-related assets are as cheap as ever once again, in light of continued weakness in the energy futures market. The crude oils’ volatile nature has only made it more difficult for value investors. The biggest factors at work driving oil prices lower aren’t showing signs of reversing yet, so be careful with “bargain priced” buys in the energy sector right now.

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