Crude oil, the single most important commodity for the world’s economy, has shot up to nearly US$120 a barrel, approaching the all-time high it reached in 2008. Or has it?
Depending on which measure for the oil price you use, a barrel of crude today (28 February) costs either $113 (Brent) or $98 (West Texas Intermediate, WTI). The US$15 differential between these two popular benchmarks for the oil price is at an all-time high. The price divergence has been put down to a temporary supply glut at the fuel hub at Cushing, Oklahoma, where the WTI price is fixed. Meanwhile, Brent crude, which has a significant Middle Eastern component, has been affected by the recent instability across north Africa and the Gulf.
This price divergence between Brent and WTI crude has had a significant effect on the performance of two of Europe’s most popular oil trackers, ETF Securities’ Crude Oil ETC (LSE: CRUD) and the same firm’s Brent Oil ETC (LSE: OILB). CRUD tracks futures contracts based on the WTI oil benchmark, while OILB tracks Brent futures.
Since the end of August, CRUD has gained 21%, while OILB is up more than double that – to 47%. CRUD’s underperformance has been made worse by the fact that WTI futures have moved into strong contango (this is when futures prices exceed the ‘spot’ price, or the price for immediate delivery. This makes replacing an existing contract with a new one more expensive). In fact, investors in CRUD have made no money in 2011, despite a 7% upwards move in the price of spot WTI oil. For an ETC holder, the gain in the spot oil price has been eaten away by contango, in a replay of what happened in 2009 (in that year, investors in oil trackers based on rolling an investment in front-month futures made very little money, despite a near 70% gain in spot oil prices).
But there’s a message here for exchange-traded product investors
XXX Fund top ten holdings
| Name of holding | new col | % of assets |
|---|---|---|
| Holding 1 | 10.0 | |
| Holding 2 | 9.0 | |
| Holding 3 | 8.0 | |
| Holding 4 | 7.0 | |
| Holding 5 | 6.0 | |
| Holding 6 | 5.0 | |
| Holding 7 | 4.0 | |
| Holding 8 | 3.0 | |
| Holding 9 | 2.0 | |
| Holding 10 | 1.0 |
that goes well beyond the oil market. Not all asset classes have a single, publicly determined reference price. Multiple opinions of an asset’s price can coexist – this also happened in parts of the bond market, for example, during the worst of the credit crisis. So be sure you understand how your tracker’s underlying investment is priced, and by whom the price is calculated.
Paul Amery edits
www.indexuniverse.eu, the top source of news and analysis on Europe’s ETF and index-fund market.