Here's How Investors Can Play High Oil Prices

September 01, 2011

Despite being one of the best-performing commodities over the past year, crude oil has been overshadowed by the likes of gold and silver. Here’s how investors can profit from high prices.

 

 Crude oil prices are back on the rebound after tumbling during the early part of August. Brent was last trading near $115/bbl, up significantly from August’s lows under $99. Prices are up 21 percent year-to-date and a whopping 51 percent from a year ago. That’s even more than gold, which is up 46 percent year-over-year.

 


 

West Texas Intermediate (WTI) remains at a steep discount to Brent due to pipeline bottlenecks in the U.S. Midwest; those prices were last trading near $89, up 20 percent from a year ago.

 


 

Despite the strong performance in crude oil prices, the commodity has been overshadowed this year. In the commodity space, gold has received much more attention, as the metal surged for an 11th straight year on the back of sovereign debt worries.

Perhaps WTI’s relatively poor performance has confused some investors. But the fact is that outside the U.S. Midwest region, crude oil is selling at its most expensive price since 2008, when the commodity hit its record near $147 (for both Brent and WTI).

These prices are a burden for consumers, but an opportunity for investors. So how can investors play this year’s high crude oil prices?

Because it’s impractical to buy physical crude oil for the average person, the closest one can get to direct exposure to the commodity is through futures. If an investor doesn’t want to dabble in futures directly, they can always buy the Brent Crude Oil Fund (NYSE Arca: BNO) or the United States Oil Fund (NYSE Arca: USO), which are two exchange-traded funds that hold Brent and WTI futures, respectively.

However, exposure to futures comes with its own set of issues. Investors must grapple with the cost of rolling contracts from one month to the next. For WTI, that cost is positive, since the forward curve is in contango. And since Brent is in backwardation, that cost is negative — meaning investors get a boost to their returns from rolling contracts over time.

Brent futures are thus a solid vehicle to bet on rising crude oil prices. But with prices already at $115 and well off their recent lows, there may be a better way to play high oil prices.

In particular, the steep sell-off in global equity markets during August has created opportunities in energy stocks.

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