After a torrid week for oil prices, Trustnet asks several fund pickers what strategies they would choose to take advantage of any potential rebound in prices.
This week, for the first time ever, the price of US oil dropped below $0 per barrel, meaning that oil producers were paying buyers to take it off their hands.
A fall in demand caused by the coronavirus-inspired economic lockdown combined with a Russia/Saudi price war have seen depressed oil prices this year.
Nevertheless, following a truce in the price war, oil cartel OPEC announced cuts to production, which should prove supportive to the market. And some countries have already begun to lift lockdown conditions spurring hopes for the global economy and increasing energy usage.
As such, some stability could start returning to the energy market and provide an opportunity for investors.
Below, Trustnet asks three fund pickers which strategies they think could benefit from any potential pick-up in oil demand and prices.
First up is a passive vehicle picked out by investment platform AJ Bell’s Ryan Hughes: SPDR MSCI World Energy ETF.
Hughes (pictured), who is head of active portfolios at AJ Bell, said the performance of active energy strategies this year was a significant influence on his choice.
“I’ve seen little evidence of sustained skill from active managers operating in the oil and energy space and therefore for investors wanting exposure I’d look at the passive route,” he explained. 
Hughes said the $142.4m exchange-traded fund (ETF) – which tracks the MSCI World Energy index – “gives exposure to around 70 of the world’s largest energy companies such as Exxon, Chevron and BP for a cost of 0.30 per cent per year,” although investors may prefer to “simply buy a big stock like BP or Royal Dutch Shell given the correlation between these big oil plays”.
The ETF has made a loss of 33.03 per cent over the past five years compared with a 4.39 per cent loss for peers in the Global ETF Commodity & Energy ETF sector (although it should be noted that it is home to a range of different strategies).
Performance of fund vs sector over 5yrs
Source: FE Analytics
While the current outlook for oil won’t be changing immediately, Hughes pointed out, it probably won’t revert back to anything like ‘normal’ until major global economies recover.
And even then, Hughes said, oil demand is likely to remain below where it was before the coronavirus crisis started.
“This creates a challenging back drop for oil which when overlaid with the continuing disagreements between Russia and Saudi Arabia means that oil producers literally can’t give their black gold away with storage facilities full to bursting,” he said. However, Hughes wasn’t the only fund picker to choose the SPDR MSCI World Energy ETF strategy for the oil rebound: Charles Stanley Direct’s Rob Morgan also chose it as the best way “play an oil bounce”.
“Funds with a decent weighting in equities in the energy sector will be the best way to play a rebound in the price,” he said. “There are not many choices for a pure energy fund in the active space and I would tend to go for a low-cost passive to get simple, low-cost exposure if and when desired. SPDR World Energy is one that stands out in this regard.
He explained: “It’s a straightforward option for those that want to take a position on oil at a time of their choosing, though personally I would generally prefer exposure to areas where cash flows are more secure and growing in the renewables space – i.e. backing a structural growth trend rather than a cyclical upturn.”
Whilst this is currently a “state of chaos” for the oil market, those companies that do survive could be in a stronger position than ever, according to Morgan, as they’ll be able to potentially pick up assets at attractive prices. But you will need to have a constructive view on prices in the medium-to-long term before buying in, he said.
Passives seem to be the most popular way to deal with the oil crisis at the moment, according to fund consultant and strategist Andy Merricks, but it’s not an easy choice.
“It’s probably easier to be asked to judge the best-looking horse in the glue factory than the best oil fund right now,” he explained.
Merricks said that if you had to pick a passive oil fund the “purest play would simply be the WisdomTree Brent Crude Oil ETF which simply tracks the Brent price”.
“Another ETF you could choose would be the Invesco STOXX Europe 600 Optimised Oil & Gas Ucits ETF in which you’d have over half your money invested in just the 3 European giants, Total, BP and Royal Dutch Shell,” he added.
One active fund that Merricks said was worthy of consideration was the £35.2m Investec Global Energy fund, which would tap into the Ninety One Asset Management’s well-regarded resources team.
The fund is co-managed by Tom Nelson and Graeme Baker and invests in companies involved in the exploration, production or distribution of oil, gas and other energy sources or companies which service the energy industry.
Over the past five years it has made a loss of 29.28 per cent, underperforming the MSCI ACWI Energy + Global Environmental ex Select GICS benchmark, which lost 27.67 per cent.
Performance of fund vs index over 5yrs
Source: FE Analytics
But Merricks points out that to invest in any of these products you need to believe that oil has a future and that global growth is going to come back stronger. Neither of which he is convinced of.
“Although many people are hoping for it, I remain very dubious that global growth will resume as if a switch has been flicked,” he concluded.
“Covid-19 continues to control us all, and until it is mastered, it is likely to continue to do so. So any early signs of recovery could be scuppered by a second wave of this thing. Oil would be way down my list of must haves, but then what do I know better than anyone else? We’re all ‘flying without instruments’ at the moment.”