ETFs crowd into top US oil contract

Analysts at ETF Securities said oil ETFs now hold between 175m-180m barrels equivalent of WTI for delivery in May, the most active futures contract. This is about 30 per cent of combined open interest in May WTI on the New York Mercantile Exchange and Intercontinental Exchange, the main energy futures bourses.

The funds’ new heft in the global oil market is “attracting more and more attention” from professional oil traders, said Olivier Jakob, managing director of Petromatrix, a Swiss-based consultancy. After oil staged a modest rally earlier this month, Goldman Sachs argued that “the key force pushing commodity markets higher has been retail investor inflows into oil ETFs”.

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Investors this year have pumped more than $ 2bn into the US Oil Fund, the largest oil ETF, bringing assets to $ 3.1bn. The fund now owns contracts for 64m barrels of WTI, a 10-fold increase from a year ago.

Only a fifth of the fund’s shares are held short, or as bets on a decline, suggesting the “bulk of USO investors are either long or have some sort of complicated trade or hedge”, said John Hyland, the fund’s chief investment officer.

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Oil ETFs are not limited to retail: among the investors with a large recent position in the US Oil Fund was Kynikos Associates, the hedge fund founded by Jim Chanos, according to a filing.

Investors buying and holding an oil ETF have the odds stacked against them. This is because WTI prices slope upward for future delivery dates, meaning the funds can afford fewer barrels of oil each time they sell an expiring month’s contract and buy a new one. Goldman Sachs warned that “any upside to price returns is being significantly eroded by losses on roll yields”.

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Oil ETFs last ballooned in early 2009 as crude prices bottomed out during the financial crisis. While the spot price of WTI more than doubled that year, the US Oil Fund rose only 50 per cent because the upward sloping price pattern, known as contango, ate into returns.

“Contango is deadly. If you’re going to own one of these things that’s susceptible to contango you’ve got to be a trader,” not a long-term investor, said Herb Morgan of Efficient Market Advisors, a US money manager specializing in ETFs.

The boom in oil ETFs has also boosted participation numbers on futures exchanges. The number of outstanding May 2015 WTI contracts on Nymex is 53 per cent higher than open interest in the May 2014 contract a year ago.

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