“Super Contango”: the fall in the price of oil causes the awakening of ETF investors | Message

Great discrepancy between supply and demand in the oil market.
The crisis in Corona worsens the situation
Private investors want to profit and fall into a trap

Oil prices have been burdened by high supply and weak demand for some time. That is why OPEC lkartell and its cooperation partners, OPEC +, recently decided to further reduce production. But even this cut in subsidies could not prevent the drop in oil prices. This in turn caused some ETF investors to wake up badly.

Falling oil prices shock markets

Last week, Monday night, there was a real collapse in the oil market. For the first time since futures trading began, the price of a May contract for US light oil, WTI, fell into negative territory. The Future of the United States Rohl temporarily fell by more than 300 percent to almost minus $ 55. Here two things came together: First, there is currently a large discrepancy between supply and demand in the oil market, and, in Second place, the following Tuesday, the May term contract fell on the American Rohl.

Last Wednesday it reached the European variety Brent, which temporarily fell to a minimum of 21 years. The fact that oil prices rose again somewhat, albeit at a low level, was due to a threat by US President Trump to Iran.

“Super Contango” – low demand and high supply

Contracts become more expensive in most futures markets, the more they are in the future due to storage costs. Therefore, the futures curve points upwards, the futures market is in “Contango”. Also with him, the further away his physical delivery is in the future, the more expensive the contracts will be. Due to the significantly higher prices for oil deliveries, market participants even speak of a “super contango.” This may indicate particularly low demand or very high supply, which is currently the case for both. The already low demand, which should be partly offset by cuts, is now further dampened by the corona crisis, which is causing the world economy to stagnate, and storage capacities are gradually being depleted.

United States Oil Fund Collapses

Institutional investors or professional traders use ETFs to sell certain investments short or bet on falling prices. However, some ETF experts, as MarketWatch reports, believe the largest oil ETF, the United States Petroleum Fund (USO), due to its wide availability on broker platforms and its popularity with one of the most Great burglary advisers in the industry, it’s in. In the recent past, it may have attracted many private investors who wanted to buy at the spot price and benefit from rising oil prices in the future. An awakening might have been waiting for them.

The LP of the United States Petroleum Fund fell 12 percent last Monday, MarketWatch said. On Tuesday, the USO dropped another 30 percent: It had increased the loss over the course of its 14 years of existence to around 96 percent.

The difference between the contracts for the initial month and the most distant months has become enormously large due to the collapse of short-term demand for l, which means that investors who will eventually switch to the next contract will have to pay more and may lose money. . Said investment products, therefore, are not intended for the long-term purchase and possession of vehicles.

Stricter regulation for ETFs containing future products?

The problem with this is that many retail investors mistakenly believed that the United States Oil Fund was a proxy to invest in the spot price of oil, reports CNBC. However, the purpose of the USO was to track the futures contract of the previous month and not the spot rate as closely as possible. Therefore, it is very important that investors, when investing, know what they own with their investment.

Because oil price futures contracts are generally only available to investors with a permit, Dave Nadig, CIO and Director of Research at the ETF Database, argues, according to MarketWatch, that investors should not “invest in the United States Petroleum Fund, if they are not in the underlying assets, they can invest. ” And furthermore: “The way to solve this problem is to open access. FINRA must have you fill out the same forms that you must complete when opening a futures market. I am sorry for those who have not understood what they are investing in. We should regulate access to these products as we regulate access to the underlying. If my mother wants to buy USO, she must fill out the same paperwork that she has to fill out to do future action, “says CNBC Nadig.

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