Oil ETP investors should consider taking profits as speculators move in

Jun 21st, 2016 | By | Category: Commodities

FACTOR INVESTING - THURSDAY 14TH JULY 2022 (08:15-11:30) - THE BERKELEY, LONDON Please join us for our annual factor investing breakfast briefing with participation from MSCI, FlexShares ETFs, Tabula and Professor Stefan Zohren, Deputy Director of the Oxford-Man Institute of Quantitative Finance. Please register now if you would like to attend.


Oil investors should consider cashing in their profits as a high number of speculators currently in the market may leave the commodity exposed to a swift correction, according to research from exchange-traded product provider WisdomTree Europe.

WisdomTree Europe warns of future volatility in oil ETPs

Viktor Nossek, Director of Research at WisdomTree Europe.

ETPs linked to the performance of oil futures have enjoyed significant gains over the past five months as the commodity has rallied from multi-year lows. Front month Brent crude futures recently reached $52.51 per barrel on 8 June 2016, representing an 88.3% gain from its 2016 low of $27.88 per barrel on 20 January 2016. The Boost Brent Oil ETC (LSE: BRND) returned 75.4% over the same period.

The possibility of further gains however, according to WisdomTree Europe, may be optimistic as the commodity is trading broadly in line with its fundamentals.

Viktor Nossek, Director of Research at WisdomTree Europe, commented: “It was easy for investors to be bullish when oil traded below $30, but given the scale of the recovery we have seen in the last four months, it is hard to make the case that oil looks undervalued now. Indeed, the recovery means it is now in line with its long-term historic price.

“As such, we don’t expect the price can be driven much higher from here based on the fundamentals. There is no reason to be bullish on the supply side as there have been few signs of disruption caused by geopolitical events, while demand is not growing because China’s growth rate is slowing.”

Oil prices have also not be able to escape the uncertainty surrounding the British referendum on European Union membership, due to take place on Thursday 23 June 2016. The possibility of Brexit occurring has been bearish for the commodity as analysts consider a potential economic slowdown in Europe and its impact on the global economy. The release of polling data indicating a gain in ground for the ‘Leave’ camp has been correlated with support of the dollar which puts further pressure on oil prices.

Brexit polls announced on Monday 20 June were mixed; YouGov gave a lead of two points to the ’Leave’ campaign while the ‘Remain’ camp were declared two points ahead in a phone poll by polling group ORB International. This marked a significant change from the weekend where the ‘Remain’ camp were three points ahead across several polling groups. Front month Brent crude futures traded down 1.5%. Furthermore, a vote to leave may cause further volatility over the long run due to the precedence set for other countries to abandon the Union.

Despite the evident uncertainty in the market, WisdomTree points out that oil still has a place in portfolios as a diversifier because it is uncorrelated to other asset classes and commodities. However, Nossek warns that “investors must tread very carefully at this point in the cycle. It [oil] is also one of the most volatile investments because of the huge amount of speculation in the price, and currently more than a quarter of the market is owned by speculators who can change their views very quickly. Given many such investors have ridden the rally, there is a chance this flow into oil could reverse, and there are more attractive options out there for investors in other asset classes.”

Investors wishing to trade off the heightened volatility in the oil market may wish to consider using inverse and leveraged ETPs to gain tactical exposures. Those available to UK-based investors include suites provided through ETF Securities or WisdomTree Europe under the Boost ETP brand.

The Boost ETPs include 1x, 2x and 3x inverse or leveraged exposure to the daily performance of WTI oil futures, as well as 1x and 3x inverse or leveraged exposure to the daily performance of Brent crude oil futures. Investors have the option of trading in US dollars or British pounds. The total expense ratios (TER) are 0.49%, 0.65% and 0.99% depending on the degree of leverage chosen.

The ETF Securities ETPs include 1x, 2x and 3x leveraged exposure to the daily performance of either WTI or Brent crude oil futures. The firm also offers 1x inverse exposures to both oil contracts. The ETPs trade in US dollars and each has a TER of 0.98%.

 

Tags: , , , , , , , , , ,

Leave a Comment