Ways to play the bounce (or not) in crude

Transcription

1 Oil and Gas Ways to play the bounce (or not) in crude With recent volatile movements in crude oil prices, investors may wish to gain a better understanding of some available crude oil plays. The two most well-known blends are the West Texas Intermediate (WTI) and Brent crudes, and there are various ways to gain exposure, either in a basket or pure-play form. Crude oil futures Crude oil futures are the world s most actively traded energy product. WTI futures, based on the North American benchmark, trade on NYMEX (New York Mercantile Exchange), while Brent futures, based on the European benchmark, trade on ICE (Intercontinental Exchange). This is the most direct way to gain exposure to oil, but investors have to open a futures trading account and maintain a daily margin. Investors also have to note the trading liquidity of the individual futures contract that they are buying. Bearish investors of oil may look to short futures. Crude oil options Crude oil options is another way for investors to gain exposure to crude oil, but more detailed knowledge may be required, depending on the structure of the option. Unusual options may also be structured for more sophisticated investors. Crude oil ETF or ETNs There are a number of ETFs offering exposure to WTI, and the most popular is the United States Oil Fund <USO US Equity>, which invests mainly in near month contracts. As such, USO will maintain a high sensitivity to spot prices but may be subject to the adverse impact of contango over the long term due to rolling costs. Investors should look out for the holdings of the ETF and how it is structured, as well as the expense fees of the fund. More actively managed funds in general have higher expense ratios. Bearish investors of oil may look to buy inverse ETFs. Crude oil related stocks Finally, the stocks of oil producing companies is an indirect way to achieve exposure to crude oil. As the profitability of oil companies tends to move along with changes in oil prices, there is generally a positive correlation between stock prices and crude oil prices. Investors may consider investing in ETFs or the stocks directly. During this recent oil price downturn, stocks of companies in the upstream segment of the oil and gas value chain have been the most hit. Midstream companies have fared better as their operations depend on the volume of oil transported (pipelines, etc.) rather than the price of oil. Downstream companies with crude oil as the feedstock have benefitted due to more favourable spreads. Low Pei Han, CFA lowph@ocbc-research.com Please refer to important disclosures at the back of this document OCBC Investment Research Asian Equities MCI (P) 003/06/20141

2 Crude Oil Futures WTI futures, based on the North American benchmark, trade on NYMEX (New York Mercantile Exchange), while Brent futures, based on the European benchmark, trade on ICE (Intercontinental Exchange). WTI futures WTI futures contracts, traded under the symbol CL, represent 1000 barrels of oil for delivery at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge. Crude oil futures are listed nine years forward using the following listing schedule: consecutive months are listed for the current year and the next five years; in addition, the June and December contract months are listed beyond the sixth year. Additional months will be added on an annual basis after the December contract expires, so that an additional June and December contract would be added nine years forward, and the consecutive months in the sixth calendar year will be filled in. Shorting futures If an investor has a pessimistic view on oil prices, he or she may choose to short oil futures. There is no restriction as to how long the investor wants to short the futures for, as long as he or she maintains the margin account. Futures account To buy or short oil futures, the investor would need to open a futures trading account. This can be done at OCBC Securities as well. NYMEX crude futures with various delivery dates Ticker Delivery Last Time Bid Ask Open Int Volume Yest Settle CLG5 Comdty Feb :35: ,826 38, CLH5 Comdty Mar :35: ,484 26, CLJ5 Comdty Apr :35: ,225 5, CLK5 Comdty May :34: ,755 3, CLM5 Comdty Jun :35: ,192 3, CLN5 Comdty Jul :34: , CLQ5 Comdty Aug :23: , CLU5 Comdty Sep :34: , CLV5 Comdty Oct :35: , CLX5 Comdty Nov :36: , CLZ5 Comdty Dec :34: ,189 1, CLF6 Comdty Jan :35: , CLG6 Comdty Feb :35: , CLH6 Comdty Mar :35: , CLJ6 Comdty Apr :35: , CLK6 Comdty May :35: , CLM6 Comdty Jun :31: , CLN6 Comdty Jul :35: , CLQ6 Comdty Aug :35: , CLU6 Comdty Sep :35: , CLV6 Comdty Oct :35: , CLX6 Comdty Nov :35: , CLZ6 Comdty Dec :35: , Screenshot from Bloomberg at 4.35pm on 15 Jan 2015 OCBC Investment Research Asian Equities 2

3 Energy ETFs/ETNs ranked by volume Name BB Ticker 30D Vol YTD Return% # of Holdings Index Weight Leverage 1 United States Oil Fund LP USO US 24,194, Single Asset N 2 ETFS Daily Leveraged Natural Gas LNGA LN 21,893, N.A. Single Asset Y 3 VelocityShares 3x Long Natural Gas ETN UGAZ US 19,200, N.A. Proprietary Y 4 United States Natural Gas Fund UNG US 11,657, Single Asset N 5 VelocityShares 3x Inverse Natural Gas ETN DGAZ US 10,365, N.A. Proprietary Y 6 ProShares Ultra Bloomberg Crude Oil UCO US 8,752, Single Asset Y 7 Horizons BetaPro NYMEX Natural Gas HNU CN 7,034, N.A. Single Asset Y 8 Horizons BetaPro NYMEX Crude Oil HOU CN 5,616, N.A. Single Asset Y 9 VelocityShares 3x Long Crude ETN UWTI US 5,498, N.A. Proprietary Y 10 Horizons BetaPro NYMEX Crude Oil HOD CN 4,810, N.A. Single Asset Y 11 Horizons BetaPro NYMEX Natural Gas HND CN 4,203, N.A. Single Asset Y 12 ipath Goldman Sachs Crude Oil OIL US 2,704, N.A. Single Asset N 13 ProShares UltraShort Bloomberg SCO US 1,551, Single Asset Y 14 ETFS Natural Gas NGAS LN 1,272, N.A. Single Asset N 15 ETFS Daily Leveraged WTI Crude LOIL LN 1,197, N.A. Single Asset Y 16 ETFS WTI Crude Oil CRUD LN 827, N.A. Single Asset N 17 SB WTI OIL ETN SBAOIL SJ 740, N.A. Unknown N 18 PowerShares DB Oil Fund DBO US 736, N.A. Single Asset N 19 NEXT FUNDS NOMURA Crude Oil Long 1699 JP 618, N.A. Unknown N 20 Mirae Asset TIGER WTI Futures KS 577, Single Asset N 21 ProShares Ultra Bloomberg Natural Gas BOIL US 321, Single Asset Y 22 KSM Crude OiL NIS KOIL100 IT 267, N.A. Unknown N 23 PowerShares DB Energy Fund DBE US 238, N.A. Multi Factor N 24 VelocityShares 3x Inverse Crude DWTI US 208, N.A. Proprietary Y 25 ELEMENTS Linked to the Rogers RJN US 196, N.A. Proprietary N Source: Bloomberg, OIR OCBC Investment Research Asian Equities 3

4 Most traded Oil ETFs/ETNs Name Bloomberg 30 Day Avg Vol YTD Leverage Remarks Ticker (mil) Return % 1 United States Oil Fund LP USO US N Holds 1mth WTI futures contracts 2 ProShares Ultra Bloomberg Crude Oil ETF UCO US Y 2x return, holds 1mth WTI futures and swaps 3 Horizons BetaPro NYMEX Crude Oil Bull Plus ETF HOU CN Y Denominated in Canadian $ 4 VelocityShares 3x Long Crude ETN UWTI US Y Exchange traded note 5 Horizons BetaPro NYMEX Crude Oil Bear Plus ETF HOD CN Y Denominated in Canadian $, inversely correlated with oil 6 ipath Goldman Sachs Crude Oil Total Return Index ETN OIL US N Exchange traded note 7 ProShares UltraShort Bloomberg Crude Oil ETF SCO US Y Inversely correlated with oil 8 ETFS Daily Leveraged WTI Crude LOIL LN Y ETC 9 ETFS WTI Crude Oil CRUD LN N ETC 10 SB WTI OIL ETN SBAOIL SJ N Exchange traded note Source: Bloomberg, OIR In the table above, we have ranked the 10 most traded Oil ETFs/ETNs globally. The most popular one is the United States Oil Fund, followed by the ProSharesUltra Bloomberg Crude Oil ETF. The third one in the list is the Horizons BetaProNYMEX Crude Oil Bull Plus ETF, but investors may wish to note that it is denominated in Canadian dollars instead of US dollars. In the slides that follow, we look at the following ETFs in greater detail: 1) United States Oil Fund (USO) 2) ProShares Ultra Bloomberg Crude Oil ETF (UCO) 3) ProShares UltraShort Bloomberg Crude Oil ETF (SCO) 4) PowerShares DB Oil Fund (DBO) 5) United States 12 Month Oil Fund (USL) OCBC Investment Research Asian Equities 4

5 United States Oil Fund (USO) Overview USO seeks to reflect the daily changes of the WTI spot price in percentage terms via percentage changes in its shares NAV, less USO s expenses. The benchmark is the near month WTI crude futures contract. If the contract is within two weeks of expiration, the benchmark will be the next month contract to expire. When the WTI futures contract comes due, the index replaces such contract with similar contracts with later expirations. The index thus "rolls" its futures positions, and continually avoids delivery of the physical commodity. Name United States Oil Fund Ticker USO US Holdings WTI near month futures Management fee 0.45% 30 day avg daily vol (m) 24.2 Traded currency USD Inception Apr 2010 Issuer US Commodity Funds Advantages 1. Largest and most liquid exchange traded product 2. Low cost 3. Great for riding short term moves in crude prices Disadvantages 1. Poor choice for investors looking to take a long term view on oil prices due to roll costs, especially when the curve is upwardsloping Source: Bloomberg, Issuer, ETF.com OCBC Investment Research Asian Equities 5

6 ProShares Ultra Bloomberg Crude Oil (UCO) Overview This ETF seeks a return that is 2x the return of an index or other benchmark fora single day, as measured from one NAV calculation to the next. Daily compounding of returns can lead to the fund s returns varying significantly from those of the index over holding periods greater than one day. Besides holding near month WTI futures, the fund also invests in swaps, more specifically Bloomberg WTI crude oil subindexswaps. When the WTI futures contract comes due, the index replaces such contract with similar contracts with later expirations. The index thus "rolls" its futures positions, and continually avoids delivery of the physical commodity. The index rolls its contracts over the course of 5 consecutive business days, starting on the 6th business day of the month. Each day, approximately 20% of each futures position that is included in the month's roll is rolled. Advantages 1. Very liquid, narrow spreads 2. Good for investors seeking leverage Name ProShares Ultra Bloomberg Crude Oil ETF Ticker UCO US Holdings WTI near month futures and swaps Management fee 0.95% 30 day avg daily vol (m) 8.8 Traded currency USD Inception Nov 2008 Issuer ProShares Disadvantages 1. As a geared product, it is intended as a short-term product 2. Poor choice for investors looking to take a long term view on oil prices due to roll costs, especially when the curve is upwardsloping 3. Relatively higher expense ratio Source: Bloomberg, Issuer, ETF.com OCBC Investment Research Asian Equities 6

7 ProShares Ultrashort Bloomberg Crude Oil (SCO) Overview This ETF seeks a return that is -2x the return of an index or other benchmark for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Besides holding near month WTI futures, the fund also invests in swaps, more specifically Bloomberg WTI crude oil subindexswaps. When the WTI futures contract comes due, the index replaces such contract with similar contracts with later expirations. The index thus "rolls" its futures positions, and continually avoids delivery of the physical commodity. The index rolls its contracts over the course of 5 consecutive business days, starting on the 6th business day of the month. Each day, approximately 20% of each futures position that is included in the month's roll is rolled. Advantages 1. Very liquid, narrow spreads 2. Good for investors seeking an inverse oil fund and leverage Name ProShares UltraShort Bloomberg Crude Oil ETF Ticker SCO US Holdings WTI near month futures and swaps Management fee 0.95% 30 day avg daily vol (m) 1.6 Traded currency USD Inception Nov 2008 Issuer ProShares Disadvantages 1. As a geared product, it is intended as a short-term product 2. Relatively higher expense ratio Source: Bloomberg, Issuer, ETF.com OCBC Investment Research Asian Equities 7

8 PowerShares DB Oil Fund (DBO) Overview DBO aims to track the level of the Deutsche Bank Liquid Commodities Indices (DBIQ) Optimum Yield Crude Oil Index (DBCMOCLE), which holds a correlation of 0.97 with the benchmark (S&P GSCI Crude Oil Index). The Index, composed of WTI futures contracts, has the following rulebased approach: When the existing contract is close to expiry, it rolls to a new contract expiring in the next 13 months that generates the maximum implied roll yield. That is, the index seeks to maximize the potential roll benefits in backwardatedmarkets and minimize negative effects from rolling down the curve in contangomarkets. Name PowerShares DB Oil Fund Ticker DBO US Holdings 12-m WTI Futures Contracts (July) Management fee 0.75% 30 day avg daily vol (m) 0.7 Traded currency USD Inception Jan 2007 Issuer Invesco Powershares Advantages 1. An alternative to indices that roll their holdings at a predetermined date (e.g. monthly) 2. Maximum possible returns to be attained given both market conditions Disadvantages 1. Relatively high management fees 2. Less sensitive to short term spot oil movements Source: Bloomberg, Issuer, ETF.com OCBC Investment Research Asian Equities 8

9 United States 12 Month Oil Fund (USL) Overview In contrast to its sister fund, USO, USL holds equal positions in each of the next 12 months worth of WTI futures contracts in a bid to mitigate the contangoeffect during an upward sloping oil market. This is hence more ideal for investors looking to take a longer term view on oil price. For shorter term investors, however, this could be a negative as the fund is less sensitive to short-term moves in spot oil. Advantages 1. Incurs less rolling costs compared to USO hence more ideal for longer term investors when the curve is upward sloping 2. Low cost Name United States 12 Month Oil Fund Ticker USL US Holdings 12 separate WTI futures contracts Management fee 0.60% 30 day avg daily vol (m) Traded currency USD Inception Nov 2008 Issuer US Commodity Funds Disadvantages 1. Smaller in size and less liquid 2. Less sensitive to short term spot oil movements Source: Bloomberg, Issuer, ETF.com OCBC Investment Research Asian Equities 9

10 Certain ETFs may underperform significantly over the long term If an investor is seeking to profit from short-term movements of the crude spot price, the USO fund is an ideal way to gain exposure. However, if the investor believes that oil prices are on an upward trend and takes a long term view about it, a better way could be buying anetf that is structured in such a way that mitigates the contangoeffect. A more direct way could be buying a longer dated futures contract, but the investor would need to be mindful of the trading liquidity of the futures contract. To illustrate, we see that in the first graph above, the WTI spot price has been trending up from Oct 2010 to Apr 2011, such that it appreciated by 40%. USO, however, only gained by 27%, underperforming crude spot prices. DBO and USL and fared better at +33% and +31% respectively.uco went up by 51%, but this is not surprising as it is a 2x leveraged fund. OCBC Investment Research Asian Equities 10

11 Crude Oil Options and Oil related stocks Crude Oil Options American options A Light Sweet Crude Oil Put (Call) Option traded on the Exchange represents an option to assume a short (long) position in the underlying Light Sweet Crude Oil Futures traded on the Exchange. The option can be exercised any time before expiry. European options Unlike an American option, a European option can only be exercised on a specific date. On expiration of a call option, the value will be the difference between the settlement price of the underlying Light Sweet Crude Oil Futures and the strike price multiplied by 1,000 barrels, or zero, whichever is greater. On expiration of a put option, the value will be the difference between the strike price and the settlement price of the underlying Light Sweet Crude Oil Futures multiplied by 1,000 barrels, or zero, whichever is greater. Other kinds of options 1) 1,2,3,6,12 months calendar spread options 2) 1,2,3,4,5 years mid-curve options 3) Daily, Weekly and other short-term options Oil related stocks Finally, the stocks of oil producing companies is an indirect way to achieve exposure to crude oil. As the profitability of oil companies tends to move along with changes in oil prices, there is generally a positive correlation between stock prices and crude oil prices. Investors may consider investing in ETFs that hold a basket of stocks or they may buy the stocks directly. During this recent oil price downturn, stocks of companies in the upstream segment of the oil and gas value chain have been the most hit. Midstream companies have fared better as their operations depend on the volume of oil transported (pipelines, etc.) rather than the price of oil. Companies that own certain kinds of oil tankers have also seen appreciation in their stock prices due to 1) more Chinese buying of crude oil, and 2) the re-emergence of storing crude oil at sea. This has driven spot charter rates for VLCCs to a new high. Downstream companies with crude oil as the feedstock have benefitted due to more favourable spreads. OCBC Investment Research Asian Equities 11

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