Key Takeaways
- Flows into oil-related products have risen sharply as investors seek exposure to the rally.
- Near-term oil prices have surged on the Iran war, while longer-dated contracts remain relatively stable.
- Retail investors should keep in mind that trying to time the market is risky.
Oil prices have surged since the war in Iran started on Feb. 28, drawing renewed attention from investors seeking exposure to the energy market.
Investor interest has also shown up in fund flows. Commodity energy ETFs attracted EUR 180 million in the first week of the war, compared with EUR 101 million the week before, according to Morningstar data. European energy sector equity ETFs saw inflows of EUR 797 million over the same period, up from EUR 113 million the previous week.
The two largest ETCs in that category in terms of fund size—one tracks WTI and the other Brent—haven risen by 22.8% and 20.5%, respectively, since the beginning of March.
Is Now the Time to Invest in Oil?
But for investors considering entering the market, the current rally in oil prices is part of heightened volatility that could expose portfolios to additional risks.
“Retail clients can trade crude through ETFs or ETNs, and there’s a natural urge to get involved in assets making headlines,” says Monika Calay, director of manager research at Morningstar UK. “Right now, that’s oil, due to the Iran conflict. But trying to call tops and bottoms as a retail investor is perilous, especially using leveraged ETFs.”
Trading Activity Rises as Oil Prices Move Into Focus
Brent crude oil prices jumped nearly 25% after the US-Israeli strikes on Iran began on Feb. 28.
French investment bank Société Générale, which offers a range of structured products on commodities, says it has not yet seen unusual demand from long-term investors seeking oil exposure, although short-term trading activity has risen significantly in recent days.
The bank distinguishes between traditional investment products without leverage, used by longer-term investors, and leveraged products, which are mainly used by traders to capture short-term market movements.
“Investors in leveraged products usually trade very pro-cyclically and focus on markets with the strongest price movements,” says Peter Boesenberg, head of public distribution Germany & Austria, at Société Générale.
“In recent weeks, this has mainly been gold and silver, but more recently Brent and WTI oil have also moved strongly into the focus of traders.”
Commodity products accounted for roughly a quarter of trading volume in leveraged products in the week of March 206 he says. Within that segment, about a third was concentrated in energy products, mainly Brent, WTI, and US natural gas.
“In historical terms that is relatively high,” Boesenberg says. “Similar activity was seen in 2020 during the negative oil price episode following the pandemic and in 2022 when the war in Ukraine broke out.”
Trading activity tends to increase when volatility rises and geopolitical developments drive market movements, he adds.
Will Oil Prices Continue Climbing? What the Oil Futures Curve Shows
Investors trading oil products also need to understand how the futures curve works, Boesenberg adds.
“For investors, the forward curve is crucial because many products without a fixed maturity invest in the nearest futures contract and roll it into the next contract each month.
“In a steep backwardation, long products sell the more expensive front-month contract and buy the cheaper next contract, which can generate a so-called roll gain, while short products incur roll losses accordingly.”
“Products with a fixed maturity, by contrast, are linked to the futures price at the time of expiry. For instance, a contract with a maturity in 2027 reacts far less to short-term movements than a product linked to the front-month contract.”
Backwardation refers to a futures curve structure in which contracts with near maturities trade at higher prices than contracts with longer maturities, generally indicating concerns about short-term supply shortages.
The backwardation in the crude oil market has steepened significantly in recent weeks. The front-month Brent contract jumped from USD 72.87 per barrel to USD 92.92 between March 1 and March 10. By contrast, the Brent futures contract for December 2026 traded around USD 66 per barrel on March 1 and closed around USD 69 on March 10, indicating that markets still expect oil prices to normalize once the geopolitical shock fades.
Oil Price Forecast: What Analysts Expect Next
Looking beyond the short-term spike, Morningstar’s long-term assumptions for oil prices remain broadly unchanged.
“For now, there’s really nothing that changes that supply/demand curve over the long term or what our assumptions were when we think about the long-term case for oil,” says Dave Sekera, Morningstar’s chief US market strategist. Morningstar’s long-term forecast remains unchanged, with WTI seen at USD 60 and Brent at USD 65.
In the short term, however, Brent crude could soon reach USD 100 or higher, adds Joshua Aguilar, director of equity research at Morningstar.
Given the recent rally, Sekera says investors may want to consider taking some profits.
“Considering oil prices have almost doubled over the past couple of weeks, I’d probably be a better seller than buyer here,” Sekera says. “I think now is probably a good time to take a little bit of profit, but I certainly wouldn’t sell my entire position.”
Oil stocks have already served their role as a hedge against geopolitical risk in portfolios, he adds. “They’ve done what we wanted them to do,” Sekera says. “They’ve been a good hedge in your portfolio against geopolitical risk.”
Fernando Luque contributed to this article.
