Falling oil prices could end badly for ETF investors | 01.05.20

• Great discrepancy between supply and demand in the oil market.
• The Crown crisis is exacerbating the situation.
• Private investors want to make a profit and fall into a trap

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

The collapse of oil prices shocks the 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. US crude oil futures temporarily fell more than 300 percent to almost minus $ 55. Two things came together here: first, there is currently a large discrepancy between supply and demand in the oil market, and second, the The following Tuesday, the May futures contract on US crude oil expired.

Last Wednesday came the European variety Brent, which temporarily fell to a minimum of 21 years. The fact that oil prices subsequently rose again, albeit at a low level, was due to a threat from the President of the United States, Trump, to Iran.

“Super Contango” – low demand and high supply

In most futures markets, the further away they are in the future, the contracts become more expensive due to storage costs. Therefore, the futures curve points upwards, the futures market is in “Contango”. Even with Oil Contracts become more expensive the further physical delivery of oil is in the future. Due to the significantly higher prices for oil deliveries, market participants are even talking about a “super contact”. 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 the cut in subsidies, is now further dampened by the corona crisis, which is causing the global 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 that 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. It may have attracted many private investors in the recent past who wanted to buy at spot prices and benefit from rising oil prices in the future. An awakening might have been waiting for them.

The LP for 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 contracts for the initial month and the most distant months has become huge due to the collapse of short-term oil demand, 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 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 would be to track the prior month’s oil futures contract rather than the spot rate as closely as possible. Therefore, it is very important that investors, when investing, know what they own with their investment.

Since trading in oil price futures contracts is generally only possible with a permit, Dave Nadig, CIO and Director of Research at ETF Database, argues, according to MarketWatch, that investors should not invest in the Oil Fund. of the United States “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 complete the same documents that she must complete in order to do future action, “says CNBC Nadig.

Editorial office finanzen.ch