Crude oil prices rose this week as production has been disrupted globally in Canada and Africa, boosting a surge of interest from investors as futures prices tend to surpass the stocks of energy companies.
During the past ten years, on average in a positive month for energy, futures gained 6.14% compared to a 5.04% for stocks, said Jodie Gunzberg, global head of commodities and real Assets at S&P Dow Jones Indices, a New York-based company which provides indices for financial markets.
"This is not surprising, since many of the producers hedge to reduce the volatility of revenues and earnings," she said.
While this upward trend appears promising, especially to novice investors and traders, oil futures also underperform when energy dips and at a greater percentage.
"The correlation of stocks to the underlying energy is 0.77 and on average when futures are down in a month, they lose 7.10% versus the stocks that lose 5.28%," she said.
Purchasing oil futures give investors greater diversification compared to buying the stocks of oil companies.
"The correlation of energy futures to the S&P 500 is 0.46 versus a correlation of 0.66 of stocks of energy producers to the S&P 500," Gunzberg said.
When the broader stock market declines, the equities of energy companies dips further than futures. When the S&P 500 fell on average in a month, it declined by 3.81%, but in those months, energy futures fell just 3.52% compared to the stocks of energy producers which dipped by 5.14%.
"The equities of energy producers had a much higher sensitivity to overall stock market losses than energy futures did," she said.
Investors often chose to buy energy futures instead of energy company stocks, because their inflation beta is 18.2 compared to only 11.3 for energy stocks, Gunzberg said.
"The same inflation protection can be gained with a smaller investment in energy futures than energy stocks," she said. "Still, many investors like the familiarity with stocks and they prefer to use them rather than futures."
As crude oil prices broke the $50 plateau in October 2015, a critical price point, more average retail investors began to watch it closely or trade it. It is now the second most traded futures contract at TD Ameritrade, mirroring the trends seen at the Chicago Mercantile Exchange.
Making money from speculative trades on crude oil futures can be challenging. Oil can be quite unpredictable and complicated when it comes to futures, said J.B. Mackenzie, director of futures and forex of TD Ameritrade, an Omaha, Neb.-based online broker. The commodity has rebounded from its record lows and a 70% decline; last June it was trading at a high of $61 per barrel of oil, but in February it had weakened to a low of $26.
While oil futures are not more volatile than other asset classes, the probability for it to rise or decline even within a 24-hour period can be higher than purchasing investments such as an E-Mini S&P 500 (ES), he said. Even a $0.50 move in prices can be expensive since one crude oil futures contract is equal to 1,000 barrels of oil and has a margin requirement of $4,000.