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How to take A View on Energy, Commodities versus Shares

The energy market plays a large role in the global economy. Energy is used for transportation and home heating, as well as industrial manufacturing. Without an energy source, most of the worlds global economies would stall. To generate a view on energy, you can use several different instruments which include commodities as well as shares. Here are some of the differences and similarities between using shares or ETFs relative to commodities to take a view on energy.

Commodities

Commodities are instruments where you take a direct view on an underlying product. There are CFDs available for crude oil, both WTI and Brent, Heating oil Gasoline and Natural gas. Crude oil is the worlds most liquid commodity. Commodity trading of crude oil happens around the globe. It is fungible, meaning you can trade the same oil anywhere around the globe. The most liquid crude oils are the US benchmark, West Texas Intermediate, and the European benchmark Brent. West Texas Intermediate (WTI) is generated from light sweet crude oil that is delivered in Cushing Oklahoma in the US. Brent is a light sweet crude oil that is delivered in the North Sea.

Crude oil is used to generate gasoline and heating oil, as well as diesel fuel. Its generally used as a transportation fuel and an industrial fuel. Natural gas is the fuel that is most widely used to generate electricity. It is also used for home heating, as well as industrial functions. While natural gas is also used for transportation, especially for busses, it is not widely used for this purpose.

Crude oil is found all over the globe. Natural gas on the other hand is only found in specific locations. While crude oil is found in liquid form, natural gas is found in a gas form and is hard to transport without pipelines. There are several new liquid natural gas terminals that are taking natural gas in a gas form and changing it to liquid to transport it overseas and then changing it back to a gas format.

Shares

Energy shares are widely used to take a view on the companies that produce, refine, transport and service oil and natural gas. This include integrated companies that focus on production and refining. Oil service companies that make drilling equipment. Midstream companies that transport oil and natural gas through pipelines, as well as production companies that explore and drill for oil and natural gas.

You can take a view on the individual shares such as Exxon or Chevron or take a view buy purchasing an ETF which allows you to take a sector view of all the shares that are held in an ETF. When you take a view on a share, you have exposure to the underlying commodity, such as oil or natural gas, as well as the profitability of the company. You also have exposure to the management that runs the company as well as exposure to the broader markets.

By trading a commodity, you only have exposure to that commodity. When you take a position buy purchasing or selling shares, you have exposure to both the commodity as well as the performance of the company.

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