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Oil resumed its strength lately and reached its highest levels since March. Brent oil hit $120 per barrel after Saudi Arabia raised crude prices for July, indicating a very tight supply. The rally came despite OPEC+ agreed to accelerate its output increases over the next two months.

Investors seeking to tap the oil rally could bet on the ETFs that are directly linked to the futures contracts. United States Oil Fund (USO - Free Report), United States Brent Oil Fund (BNO - Free Report), Invesco DB Oil Fund (DBO - Free Report), United States 12 Month Oil Fund (USL - Free Report), and iPath Pure Beta Crude Oil ETN (OIL - Free Report) are popular oil ETFs that could be interesting plays to directly deal with in the futures market in the coming months.

The easing of COVID-19 restrictions in China and the European Union agreement to ban 90% of the Russian crude by the end of the year added to the strength. The dual news will continue to bolster demand and exacerbate worries over the already tightening supply. Additionally, an inflationary environment in many countries as well as the prospect of rising demand from the start of the upcoming U.S. summer driving season caused a spike in oil price.

Oil price has been on a rising trend this year so far due to supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East heightened concerns over tight energy supply amid increasing demand.

United States Oil Fund (USO)

United States Oil Fund is the most popular ETF in the oil space with an AUM of $2.9 billion and an average daily volume of 5 million shares. USO seeks an average daily percentage change in its net asset value for any period of 30 successive valuation days, to be within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period.

United States Oil Fund has an expense ratio of 0.81%

United States Brent Oil Fund (BNO)

United States Brent Oil Fund provides direct exposure to the spot price of Brent crude oil on a daily basis through futures contracts. BNO invests primarily in listed crude oil futures contracts and other oil-related futures contracts and may invest in forwards and swap contracts.

United States Brent Oil Fund amassed $316.1 million in its asset base and charges 1.02% as annual fees and expenses. Volume is good as it exchanges 1.4 million shares a day on average.

Invesco DB Oil Fund (DBO)

Invesco DB Oil Fund provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The Index is a rules-based index composed of futures contracts on WTI.

Invesco DB Oil Fund has an AUM of $540.2 million and charges 77 bps of annual fees. DBO trades in an average daily volume of 1.1 million shares.

United States 12 Month Oil Fund (USL)

United States 12 Month Oil Fund provides investors with exposure to the daily price movements of West Texas Intermediate’s light, sweet crude oil. USL's benchmark is the near-month futures contract to expire and the contracts for the following 11 months for a total of 12 consecutive months. If the near-month futures contract is within two weeks of expiration, the benchmark will be the next month contract to expire and the contracts for the following 11 months.

United States 12 Month Oil Fund is unpopular and less liquid with an AUM of $143.7 million and an expense ratio of 0.90%. USL trades in an average daily volume of 48,000 shares.

iPath Pure Beta Crude Oil ETN (OIL)

iPath Pure Beta Crude Oil ETN is designed to provide exposure to the Barclays WTI Crude Oil Pure Beta TR Index. OIL accumulated $139.7 million and trades in a volume of 75,000 shares a day.

The fund charges 57 bps of annual fees.

Backwardation: Friend of Futures Market

While the above products provide the easiest way to gain a direct exposure to the oil commodity, it have serious consequences on the profit (or loss) incurred by investors. This is especially true as these ETFs and ETNs need to roll from one futures contract to another to avoid physical delivery and is thus susceptible to the roll yield. Roll yield is positive when the futures market is in backwardation (the front-month contract is higher than the next-month contract) and negative when the futures market is in contango (the front-month contract is lower than the next-month contract).

Currently, the futures market reveals that crude oil is in prolonged backwardation, which is bullish for the commodity and the oil ETFs. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. If the front-month contracts were more expensive than the next month, investors would enjoy profits on every roll, thereby maximizing their total returns. A market in backwardation also signifies that demand exceeds supply and shoots up oil prices. This trend is likely to persist, at least in the near term, acting as the biggest catalyst for the oil.

As a result, contango does not look like an obstacle for investors over the next few months.