update June 2020: This ETF has been discontinued. We are looking for an alternative.
Investing and trading in an oil ETF is always a bit confusing as there are more “oil prices”. You always have to check first what kind of oil price the media are talking about.
The 2 most important oil prices are Brent and WTI. Brent oil is named after the Brent oil field that is owned by Shell. This Brent oil field is situated in the North Sea just out of the English shoreline.
The oil coming from this Brent oil field has a certain quality which became some sort of a standard for oil with similar characteristics. Almost all oil originating from Europe, Africa and the Middle East is traded under the name of Brent oil and it is traded for the same price.
WTI oil stands for West Texas Intermediate, you can also call it the American oil and it originally comes from the Texas oil field where the oil is pumped out of the ground through pump jacks.
How to invest in an oil ETF
Of course the major driving force in the market is the battle between supply and demand. But there is also OPEC which tries to determine and manipulate prices to the benefit of its members.
But not all oil producing countries are members of OPEC which limits the power of OPEC. As the OPEC syndicate is trying to manipulate the oil price through production agreements it is difficult to do that if not all major producing countries are controlled.
The time that OPEC is really dominating the oil markets is definitely over. Supply and demand are thus the reigning forces. Talking about the supply side, as a result of new techniques shale oil has also shaken up the existing oil market players.
In my opinion I expect that oil prices will remain around break even prices as OPEC will not be able to push its will anymore. With break even prices I am talking about a market mechanism that functions along the following lines:
Each singular oil well has its own cost of production. With each oil price decline some oil well will turn in negative price territories. If the oil price will stay at these levels, they will shut these underperforming oil wells down. In this market mechanism the supply of oil will diminish during oil price declines.
But there is an even bigger impact caused by lowering oil prices. As profitability is under pressure there is not enough money to invest in exploring new oil fields. In spots where they know that there is oil in the ground but the cost of getting it out is higher than the market price they will just not explore it.
This adds to the diminishing supply of oil. If the demand for oil should pick up it will take years to get these new oil fields operable. That makes way for higher oil prices.
Doubling or tripling oil prices will be possible, just as we saw in the past when OPEC was ruling the markets. For me a low oil price combined with postponing oil exploration investments and shutting down existing wells will be the perfect moment to get into this oil ETF.
ETFS Brent Oil ETF
I chose to invest in this Brent oil ETF from ETFS as the market in Europe is large and it is traded in Euro’s. Brent and WTI prices move similarly and the price differences between the two are rather small.
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ETFS Brent Oil info:
ETF provider: ETF Securities
Exchange: Euronext Parijs
This ETFS Brent Oil has quotations on different exchanges and is known under several ticker symbols. As long as the ISIN number is identical you are dealing with the same ETF.