Investors keen to invest in oil should focus on five key points when deciding to buy one of the more volatile assets over the past few years, according to ETF provider WisdomTree.
Oil has had a turbulent time recently, reaching highs of over $100 per barrel before falling back to as low as $28 per barrel.
As the below graph shows, despite a strong rebound in 2016 Brent crude oil remains 50 per cent lower than the high prices experienced in 2014.
Performance of Bloomberg Brent Crude Sub GTR index over 5yrs
Source: FE Analytics
In the first trading day of 2017, oil was typically unpredictable: rising in the morning before plummeting in the afternoon – a microcosm of its run over recent years.
“Oil prices embarked on quite a rollercoaster ride on the first day of trading in the new year,” noted analysts at Commerzbank.
“A nearly 3 per cent surge to an 18-month high in the morning was followed by a massive slump that began in the afternoon.”
“Brent and WTI [West Texas Intermediate] shed approximately $3 from their respective peaks and ultimately closed trading more than 2 per cent down.”
Despite the turbulence in the market, oil remains a key commodity that investors track with great interest. However, knowing how best to judge the key trends can be difficult.
Below, WisdomTree outlines the areas investors should pay close attention to when investing in oil and explains how they can gain exposure through passive vehicles. 
Firstly, the ETF provider says investors need to know whether they are dealing with Brent crude or WTI.
“There are two key oil prices that the market tends to follow: Brent crude, which refers to the ‘sweet light crude’ oil extracted from the North Sea and is used as a benchmark globally. “
“WTI refers to West Texas Intermediate light crude oil extracted from the US, but because it’s landlocked, it can be expensive to transport to the rest of the world. There are other benchmarks as well – like Dubai/Oman which is used as a benchmark in Asia.”
The big players in the oil space are represented by the Organisation of Petroleum Exporting Countries (OPEC) which has 13 members, including those with some of the largest reserves in the world.
It produces around a third of the world’s oil and recently agreed a deal for the cartel to cut production by 1.2 million barrels a day while the non-OPEC countries also agreed a further reduction of 558,000 barrels a day in an effort to stabilise the oil price.
This news sent Brent crude prices above the $50/barrel mark, a strong recovery from the recent lows of below $28/barrel reached in January 2016.
The next OPEC meeting takes place in May but WisdomTree says markets are waiting to see what the key oil-producing countries who are not part of OPEC were going to do, adding: “These non-member countries, like Russia and the US are ones to watch.”
However, oil prices are susceptible to not just supply-side economics but other variables such as stock piles and inventory.
WisdomTree noted: “Weather related vagaries in Europe and North America can play a significant part as can geopolitical risk. The latter has the potential to cause disruption in a number of ways.”
Indeed, with globalisation coming under increased pressure from populist political agenda and the potential fractious relationship between a Donald Trump-led US and China, macroeconomic data will be key for oil prices moving forward.
On the demand side, the second largest consumer of oil after the US is China with WisdomTree recommending investors pay close attention to the development of Chinese economy.
“Whilst China’s growth may not be what it was, they’re still on track with 6.7% growth year on year,” the ETF provider said.
However, while you can look at some of the macroeconomic fundamentals, a lot of oil contracts are traded by short-term traders.
“It means that prices aren’t determined just by supply and demand nor by sentiment alone. The Commodity Futures Trading Commission (CFTC) in the US publishes a report of the net positions held by non-commercial investors allowing one to track investment flows,” WisdomTree said, adding that this can provide important information for investors.
So how can you trade oil?
WisomTree said: “It’s possible to express either a long or short view. If you want to manage a position in oil, either WTI or Brent, there are exchange traded products (usually ETNs or ETFs) which allow you to do this.
“Exchange-traded products are passive, open-ended instruments that are traded on an exchange like a stock.
“Those tracking commodities, as in this case, can be aptly called exchange traded commodities (ETCs). With ETNs/ETCs, it’s also possible to have a leveraged long position if you feel bullish about the trade or even a leveraged short if you’re feeling bearish.”