Crude Oil Prices Go Negative – Is Energy Sector Funds Worth Buying?

COVID-19 pandemic is evoking several wonders across the globe. Due to the lockdown orders in many countries over a few weeks, crude oil consumption has been almost negligible. Consequently, there is an excess supply of oil and gasoline and the space required to store the excess is running out. 

The cause had dropped the crude oil prices to $14.47 per barrel on 19 April—a 21-year low. The following day, it briefly fell to negative because of the surplus stock in the global energy market.

On the other hand, investors wish to take advantage of the low prices by investing in the thematic and sector funds that focus on energy. These funds don’t focus only on oil and gas but the energy sector on the whole. These funds lead to substantial allocations to non-oil companies, such as coal and renewable energy companies as well as downstream oil companies that have no direct reliance on oil price recovery.

Also Read: Sensex Ends the Day 2% Higher; RIL Shoots up Over 10%

In contrast, experts have expressed their strong opposition to investing in thematic energy funds. They have stated that they don’t advise people to invest in the sector or thematic funds because that runs on timing the market. There are too many uncertainties involved. It was mentioned that investing in the sector/thematic funds is not an effective way of gaining from oil price variations.

Since 12.44% of the Nifty covers the oil and gas sector, a diversified equity fund can give exposure to the oil price. Those who have an international broking account can invest in ETFs tracking oil. 

Further, a US SEC-registered financial advisor has warned about the US-based ETFs that track the oil price by investing in futures contracts, such as USO and United States Oil Fund. They come with added costs involved in rolling from one futures contract to another, making them unsuitable for long-term investments. Also, they are not very accurate in tracking oil prices. Alternately, he suggested that investing in the stocks of companies in the oil and gas sector can be a smart move. 

Finally, investors are advised to stay away from commodity-related sector/thematic funds as they are concentrated portfolios and are highly risky.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in