Oil is volatile again – here are two practical ways to get exposure

Oil is back at the centre of market attention — and for good reason.

As the Middle East conflict escalates, markets are increasingly focused on supply risk. Reports of disruption around key shipping routes and attacks on energy infrastructure have pushed crude prices higher and revived investor interest in oil as a hedge. Brent crude, the global benchmark, has jumped since 27 February to above USD 80 per barrel. In Europe, natural gas prices have also risen sharply.

The risk is that the conflict broadens and becomes more drawn out. In that scenario, it can make sense for some investors to hold a small amount of oil exposure as insurance.

This article is a practical follow-up to our house-view note (“Oil jumps after US–Israel strikes on Iran – what investors should do now”). Here, we focus on product options available on our platform for investors looking to hedge supply-shock risk.

Two ways to get oil exposure

Broadly, there are two approaches:

• Futures-based oil ETFs – closer linkage to crude oil prices, but more volatile and not ideal as a long-term holding.

• Equity-based energy ETFs – hold energy companies; typically less volatile day-to-day, but a less precise hedge.

1) Futures-based oil ETFs (closest hedge)

Futures-based oil ETFs are designed to track oil prices more directly. They do not invest in physical oil. Instead, they gain exposure using oil futures contracts.

If your goal is to hedge a supply deficit scenario, futures-based oil ETFs typically provide the closest linkage to crude oil price movements. The trade-off is that volatility can be high – price swings can be large and sudden.

The key risk to understand: roll costs

Oil futures contracts expire. To maintain exposure, the ETF must sell the expiring contract and buy a later-dated contract. This process is called rolling.

Often, the later-dated contract is more expensive than the expiring one. In that case, the fund repeatedly sells lower and buys higher – a drag commonly referred to as roll cost. Over time, this can cause a futures-based oil ETF to lag the spot oil price, especially when this “roll drag” persists.

Brent vs WTI: does the benchmark matter?

Some futures-based products track Brent, while others track West Texas Intermediate (WTI).

Brent is the international benchmark and is more closely tied to seaborne crude flows. In periods when markets worry about Middle East shipping routes, Brent can react more sharply. WTI is the US benchmark and can be more influenced by US-specific supply, inventories, and logistics.

In practice, Brent and WTI are still highly correlated for most investors, especially over short windows. If your allocation is small and tactical, either can work. What often matters more is fees and liquidity.

Our futures-based oil ETF shortlist

We focus on products that invest mainly in front-month contracts (contracts nearest to expiry). These tend to be more sensitive to short-term price movements – which is usually what investors want when using oil as a tactical hedge.

Among the options, WisdomTree Brent Crude Oil (LSE:BRNT) stands out as a relatively cost-efficient way to gain exposure to the international benchmark for crude oil.

Table 1: Shortlisted futures-based oil ETFs

2) Equity-based energy ETFs (less volatile, but also less precise)

Equity-based energy ETFs hold energy companies – typically large integrated oil & gas firms and broader energy sector exposure.

This can still act as a form of hedge because energy companies often generate stronger cash flows when oil prices rise, and some pay meaningful dividends. But it’s important to recognise what you are buying: these are equities, and they can fall if broader equity markets sell off.

So this is not a pure oil hedge. It is oil-sensitive equity exposure.

Our equity-based shortlist

For investors who want oil-sensitive exposure that is typically less volatile day-to-day, we highlight the following:

Table 2: Shortlisted equity-based oil ETFs

Among these, the Energy Select Sector SPDR Fund (NYSE:XLE) stands out on cost and liquidity. It is also the largest and most actively traded energy sector ETFs.

Which should investors use?

A simple rule of thumb:

• If you want the closest hedge to an oil supply shock, buy the WisdomTree Brent Crude Oil (LSE:BRNT). Futures-based exposure is usually more effective – but expect higher volatility.

• If you want oil-sensitive exposure that is typically less volatile day-to-day, buy the Energy Select Sector SPDR Fund (NYSE:XLE). Equity-based energy ETFs may offer a smoother ride, but they are a less precise hedge.

Portfolio guidance: keep it small, rules-based, and time-bound

Oil exposure can be useful as a tactical hedge when supply disruption risk rises. But it needs discipline.

Our guidelines

• Keep it small (2-3% of portfolio). Treat it as insurance, not a core allocation. A hedge should reduce regret in a bad scenario – not create a new source of regret if oil falls back.

• Use rules. Be prepared to trim after sharp rallies, or reduce exposure if disruption risks fade – especially for futures-based oil ETFs. As a guide, trim back if oil exposure grows beyond 4-5% of the portfolio (rebalance to the 2-3% target). Consider exiting if the position is down around 20% from entry and there is no evidence of sustained supply disruption.

• Be clear on time horizon. This is typically a short-term tactical position, not a long-term holding. Check weekly for key developments and decide whether the hedge is still needed.

For most investors, the core of the portfolio should still be built on diversification and assets with durable earnings visibility and structural growth drivers – not on trying to predict the next headline.

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.