There are many different ways to gain exposure to the price of oil, as most Canadian investors are well aware. The Toronto Stock Exchange (TSX) happens to be overloaded with oil companies due to the unique composition of the Canadian economy.
The thing about investing in one particular oil producer is each individual company has a unique set of circumstances with respect to their income statement and balance sheet.
The amount of leverage utilized by a given company, the type of oil they produce, the geographic region in which they produce, and a number of other factors all contribute to the operating leverage these companies provide to the price of oil.
The idea is that a 1% increase in the price of oil could impact a producer’s bottom line positively by 3%, and vice versa. That is the sort of issue that has caused producers a lot of pain of late as commodity prices have plummeted.
If you’re an oil investor seeking to hedge the price of oil, or you simply want to make a bet on where you think the price of oil will be in, say, a year from now (which is essentially what you would be doing anyway by investing in an oil producer today, only with more leverage), investing or trading in the iShares S&P/TSX Capped Energy ETF (NYSE:XEG) is the way to go.
This ETF directly tracks the price of oil and is relatively liquid (compared to many oil producers, making this an excellent way to play the commodity price of oil, if you choose to do so.
Invest wisely, my friends.
