$100 Crude Oil: Understanding Energy ETFs' Varying Reactions

Brent crude oil has surpassed $100 per barrel for the first time since July, while US benchmark West Texas Intermediate (WTI) reached $95. The price surge is attributed to escalating tensions in the Middle East, including US military strikes on five Iranian oil tankers and Houthi attacks on Saudi energy facilities.

This volatility serves as a reminder of why maintaining energy exposure is crucial for investors, even when the sector appears out of favor. However, not all energy exchange-traded funds (ETFs) respond to commodity spikes in the same way, highlighting the importance of understanding each subsector's sensitivity to oil prices.

Upstream companies, such as those found in the State Street SPDR S&P Oil & Gas Exploration & Production ETF (XOP B+), tend to be highly sensitive to commodity price fluctuations. These firms make money by extracting oil and natural gas and selling them at market rates, making their margins expand directly with crude prices.

For investors seeking steady income with lower volatility, midstream companies remain the defensive energy play. Midstream names, like those found in the Alerian MLP ETF (AMLP A-), operate pipelines and storage facilities, earning fees for shipping and handling that lend to stable cash flows and insulate them from swings in energy commodity prices.

The State Street Energy Select Sector SPDR ETF (XLE A) is another option, but it has a concentration of nearly 35% in just two integrated majors: Exxon Mobil (XOM) and Chevron (CVX). These firms operate upstream production alongside downstream refining operations.