Traders work in the energy options pit at the New York Mercantile Exchange. After pouring the most money into funds that track oil prices in two years last month, investors are ramping up the bet even further this month, moving cash in at twice the October pace.
Bloomberg/New York
While calling a bottom in oil is proving a tricky, and costly, exercise for contrarian investors, they are undeterred.
After pouring the most money into funds that track oil prices in two years last month, investors are ramping up the bet even further this month, moving cash in at twice the October pace. The four biggest US exchange-traded products tied to oil had 70.5mn shares outstanding on Wednesday, the most since May 2013, according to exchange data compiled by Bloomberg. More than 1mn shares in the ETFs are being created on average each day this month, the result of soaring demand.
The trade has gone terribly since investors first started adding to oil ETF positions at the start of October. West Texas Intermediate, the US crude benchmark, has tumbled 15% over that time, swelling its selloff since a June peak to 28% as soaring US output and a slowdown in global demand growth created a supply glut.
“Price momentum is still negative, and yet someone is buying,” said Stoyan Bojinov, a Chicago-based analyst at ETF Database. “Either they are wrong and they are hoping for the reversal, or they are establishing a position while everybody else is still selling.”
The inflows have almost been non-stop since October 1, with more shares being added to the four biggest oil ETFs than redeemed on all but four days.
“In commodity ETFs and other hard-asset ETFs, you often see share counts increasing as prices fall, because people assume oil won’t be at $75 or $80 forever,” said Matt Hougan, president of San Francisco-based research firm ETF.com. “The more demand there is for a particular ETF, eventually the more shares will have to be created to meet that demand.”
WTI for December delivery fell 9 cents to $77.09 a barrel at 12:41 pm Singapore time in electronic trading on the New York Mercantile Exchange. On Wednesday the contract closed at the lowest since October 2011.
Crude output in the US is the highest in three decades and Opec is producing the most in more than a year, while global demand growth is forecast to slow.
The US Energy Information Administration said that WTI will average $83.42 a barrel next year, down from last month’s estimate of $101.67. Consumption around the world will be 92.5mn barrels a day, from 92.71mn forecast in October.
The four funds, including the US Oil Fund and ProShares Ultra Bloomberg Crude Oil, received a combined $431mn last month, the most since October 2012, according to data compiled by Bloomberg. They have seen an inflow of $284.6mn this month as of November 11. The US Oil Fund, the biggest oil ETP, received $183.8mn this month. The fund, which tracks WTI prices, slid 1% to $29.14 on Wednesday and is down 18% this year.
The ProShares fund, which follows the Bloomberg WTI Crude Oil Subindex, saw $62.2mn flow in. Shares dropped 1.7% to $21.81.
The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the US Oil Fund, climbed to 37.23 on October 14, the highest since July 2012, from a record low of 14.50 in June. The gauge was 30.71 on Wednesday.
“Obviously, oil can go lower,” said John Hyland, chief investment officer of US Commodity Futures Funds, an Alameda, California-based ETP manager who manages the US Oil Fund. “A lot depends on Saudi Arabia,” Opec’s largest producer, he said.
Investors have put more money into the ETFs even as the premium being paid for near-term delivery has narrowed, a development that typically makes the funds less attractive.
December WTI was 3 cents more expensive than the January contract yesterday, down from 58 cents four weeks ago.This structure, known as backwardation, allows funds to own more barrels of crude each month as it sells the expiring futures and buys the less expensive next-month contract. The smaller the gap between the contracts, the smaller the funds’ potential gain. Futures are in contango when the front-month contract is less expensive than later delivery.
“WTI’s front month contract is still trading in backwardation,” Hyland said. “You might have guessed that such a fall in oil would have resulted in contango, and we may still get that, but it has not really arrived yet.”