Dated Brent, a key benchmark based on North Sea oil, is above $100 for the first time since July at the time of writing, as the on/off Middle East crisis is on again this week and has sent oil prices up in response.
Dated Brent reflects demand for physical oil right now and is an example of a spot price, meaning the price to complete a commodity transaction immediately. Traders also watch futures prices, which are contracts to buy or sell oil at a point in the future, with most activity in contracts closest to expiry.
Individual investors cannot trade physical oil directly. They could trade oil futures, but using an exchange-traded fund such as WisdomTree Brent Crude Oil ETF (LSE: BRNT) is simpler, MoneyWeek notes. Oil ETFs have traditionally worked by buying near-term futures contracts and rolling them over as each contract nears expiry.
That means a typical oil ETF will reflect trends in near-term oil futures and will also gain or lose from roll yield. If futures prices for the nearest months are higher than those for more distant months, the ETF sells higher and buys lower each time, earning a profit. If nearer-month prices are lower than more distant months, the roll yield is negative.
If spot prices spike by much more than futures, as is often the case in a crisis, a typical oil ETF will not rise by as much as the spot price. The newer Onyx Spot Return Crude Oil ETF (LSE: OIL) takes a different approach, holding very short-term daily Dated Brent futures that it continuously rolls over, making it a closer proxy for the spot price. It launched in June and has beaten traditional ETFs since then, though whether it keeps doing so depends on whether spot prices remain much higher than futures and on whether the futures roll yield is positive or negative.