An innovative method of trading an oil spike is through oil exchange-traded funds

According to James Mackreides, this oil ETF adopts a different strategy than its peers and might be more susceptible to sudden shocks

Oil prices have increased as a result of the ongoing Middle East crisis this week. Dated Brent a key benchmark based on North Sea oil is above £100 for the first time since July at the time of writing.

The question of how to play higher prices arises whenever there is a significant movement in the price of oil. The answer to that relies on the type of move you anticipate.

The benchmark that you are most likely to hear is Dated Brent, which illustrates the current state of physical oil demand. It is an illustration of a spot price, which is the cost of completing a commodity transaction right away. With Dated Brent, the buyer is purchasing an oil cargo that will be loaded within the next few days or weeks on a predetermined date.

However, futures pricesthe cost of a contract to purchase or sell oil at a later dateare also something that traders closely monitor. That date could be one month, three months, six months, or more in the future. There is a lengthy chain of contracts that can go on for years, but the ones that are closest to expiration see the most activity.

Direct trading of physical oil is not possible for individual investors. An exchange-traded fund (ETF) like the WisdomTree Brent Crude Oil ETF (LSE: BRNT) is a more straightforward option than trading oil futures. However, using an ETF still requires understanding the difference between spot and futures prices.

The operation of oil ETFs.

Oil ETFs have historically operated by purchasing futures contracts for short-term months, whereas ETFs for gold or other metals frequently hold physical metal and reflect the spot price. The ETF sells its current stake in each contract as it approaches expiration and rolls over into a different contract a month or two later.

Thus, the trends in short-term oil futures will be reflected in the ETF. Additionally, it will profit or lose from roll yield, a less obvious source of return. The ETF will make money by consistently selling higher and buying lower if futures prices for the closest months are higher than those for farther-off months. In contrast, the ETF will be selling lower and buying higher, and the roll yield will be negative, if prices for closer months are lower than those for farther-off months.

A standard oil ETF won't increase as much as the spot price if, as is frequently the case during a crisis, spot prices rise significantly more than futures. The relatively new Onyx Spot Return Crude Oil ETF (LSE: OIL), on the other hand, adopts a different strategy. It consistently rolls over very short-term daily Dated Brent futures. It is a closer proxy for the spot price as a result. This product has outperformed conventional ETFs since its June launch (see chart). Whether spot prices continue to be significantly higher than futures and whether the futures roll yield is positive or negative will determine whether it continues to do so. In any case, it's intriguing to see a fresh approach to trading sudden shocks to actual oil prices that depends less on changes in futures.

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