Tensions with Iran and the gradual recovery in the global economy have refocused investor attention on the oil market in recent months. The West-Texas spot price for crude oil has leapt from about US$75 a barrel in early October last year to be now more than US$105 – a rise of 40%. There are fears that oil prices will move higher, which in turn could affect global energy prices more broadly.
So how can investors most easily gain exposure to rising energy costs?
With the introduction of an exchange-traded fund, or ETF, with oil exposure to the Australian market, these choices are becoming easier.
Hedged oil ETF
It’s now possible, for example, to buy direct exposure to the US dollar oil price through the BetaShares Crude Oil Index ETF (ASX:OOO), which is also hedged against movements in the Australian dollar. That means investors won’t lose out if the Aussie dollar continues to rise – negating oil price returns in US-dollar terms – and allows pure risk exposure to oil prices alone.
Since this ETF’s inception on 11 November last year, it has increased by 7.8%, which is close to the 8.2% rise in oil prices over this time.
Note, however, that this index gains exposure to oil prices through the purchase of futures contracts, and there can be some divergence in performance against that of the spot oil price where there are large price premiums or discounts built into the futures curve.
In general, the ETF will tend to underperform movements in the spot oil price when future prices are above it, though outperform when future prices are below the price. The broad movements in both oil prices and the ETF overtime, however, should be similar.
Energy sector ETF
Another option is to buy exposure to the Australian S&P/ASX200 energy sector (ASX:ENY), which includes Australia’s leading blue chip energy stocks. This includes companies engaged in the exploration, production and distribution of energy, such as oil, gas, coal and uranium. It includes major oil and gas producers, energy related mining service companies, and petrol refiners and distributors.
However, it excludes some of Australia’s major diversified mining companies – such as BHP Billiton – due to their broader exposure to minerals and metals.
Tops Holdings in the S&P/ASX200 Energy Sector ETF as of 20 March 2012.
As seen in the chart below, there has been a broad correlation between relative performance of the energy sector and oil prices over recent years, especially during the strong run-up in prices prior to the global financial crisis. The energy sector has been among the strongest sectors in recent months, which is line with the recovery in oil prices.
The outlook for oil
With the United States economy in clear recovery mode, China still posting reasonable growth and Europe shaking off its sovereign debt concerns, the outlook for the global economy – and hence global energy demand – is firming.
At the same time, the United States is still not completely satisfied with Iran’s protestations that it is not enriching uranium for the purposes of building its own nuclear bomb. Eventual, military strikes again Iran – by the United States or possibly Israel – still can’t be ruled out, which could inflame passions across the critical oil producing Middle East region. Indeed, one scenario still deeply troubling energy analysts is a possible retaliatory move by Iran to block or sabotage the Strait of Hormuz, through which around one-third of the global oil trade passes each year.
That said, geo-political tension aside, the global economy should remains reasonably well supplied with oil for at least the next year or so – with spare production capacity in countries such as Saudi Arabia at reasonable comfortable levels. In recent days, for example, the Saudis have indicated that they could and would pump more oil to supply global markets if needs be in order to keep a cap on prices.
And even if energy prices don’t rise, some exposure to oil prices and/or energy companies could provide a handy source of portfolio diversifications, and provide some insurance should the energy outlook turn nasty.
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