The $2.3 billion that has poured into funds that track oil since December would seem like a logical enough investment. After crude dropped more than 50 percent to a five-year low, the thinking goes, prices are due for a rebound.
There’s just one problem. And it’s big.
The market is stuck in something called contango, an exotic term that really just means that prices on crude contracts to be delivered in coming weeks are lower than those on contracts due later. Exchange-traded fund managers, as a result, are left to sell the cheaper expiring oil contracts and reinvest the proceeds in the more expensive ones due the following month, creating a vicious cycle that erodes returns.
Consider these numbers. From 2009 to 2012, crude prices soared twofold, yet, because contango conditions existed then too, the biggest U.S. oil fund gained less than 1 percent over that time. Those figures — which seem almost implausible to the uninitiated — highlight how difficult it could be for the oil fund investments to pay off even if prices actually rebound. Analysts say contango won’t vanish anytime soon, predicting it will persist throughout 2015 because of the glut of oil.
“Right now, it’s a particularly difficult situation to be invested in oil exchange-traded funds,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. U.S. crude supplies “are likely to witness a significant increase during 2015, and it is more certain that the contango will be sustained while excess inventory persists.”
Investors have sent $1.03 billion into the four biggest oil exchange-traded products so far this month after investing $1.23 billion in December, which was the biggest monthly gain since 2010.
