As discussed here previously, the current state of contango in the crude-oil market is failing to dissuade retail investors from piling into long WTI futures positions. This is despite the fact that the contango means investors in passive ETF-type funds stand to lose on every contract expiry (because funds have to pay a premium to roll positions into the next month).
Yet funds like the US Oil Fund have never been more popular.
The problem is reflected in Monday’s charts from Olivier Jakob at Petromatrix. Note the following graph which shows the current losses incurred on contract rolling (the so-called ‘roll yield’):
And now note the corresponding expansion of the US Oil fund:
Jakob, however, does appear to believe that at least some investors are beginning to catch on. Accordingly, he suggests a flattening of the curve could lead to an even bigger expansion in size of oil ETF positions. As he explains (our emphasis):
There has been a significant increase in positions of passive instruments (ETFs) in crude oil despite the heavily negative futures roll yield. The negative roll yield has started to bottom on Brent but is still extremely volatile on WTI. The narrowing of the crude contango if continued will not only take some layers of floating storage off the table it will more importantly bring higher interest from passive investors. It will take time for the layers of crude oil stocks to be reduced, but if the crude oil contango continues in its recent narrowing trend we will expect to see stronger flows of flat price buying on dips.
If any dramatic influx of long fund positions does occur – especially on signs the WTI curve is indeed flattening on the front-end – it would certainly add credence to Goldman Sachs’ view that when the bullish reversal comes it will come quickly.
In his FT opinion piece last Thursday, Jeffrey Currie, global head of commodities research at the bank, meanwhile, emphasised how the market has become disengaged from the actions of commodity investors . As he explained (our emphasis):
Furthermore, the current market distortions and volatility do not reflect the actions of commodity investors. For one, the ratio of traders today betting that oil prices will rise compared with those who expect further declines is greater than when crude hit $147 a barrel, reflecting speculators’ views that crude is cheap. In addition, while notional investment in commodity indices is down massively, the number of barrels they own is only down 20 per cent. This reinforces our view that today, like last summer, investors have little impact on oil prices and the observed price volatility. Instead, the focus must be on inadequate energy infrastructure investment.
The point is well illustrated by the following chart from Petromatrix, also reflecting the degree to which general net speculative length increased in November/December 2008 – just as the contango was becoming increasingly pronounced:
On a side note – the above cannot be solely accounted for by investors going long front-end to play the storage arbitrage game, as most players capable of storing oil are classified by the CFTC as commercial players.
Related links:
Energy volatility reflects lack of investment in oil industry – FT
How contango affects ETFs – FT Alphaville