Forget WTI, Play Crude With This Oil ETF (BNO) - Leveraged ETFs
21 Dicembre 2011 - 12:01PM
Zacks
In what was yet another strange year for oil, prices for the
vital commodity moved across the board throughout 2011. WTI crude
surged in the first four months of the year only to tumble
throughout the summer, reading a low below $77/bbl. in early
October. After this nadir, WTI took off; gaining about $20/bbl.
before experiencing some volatile trading to close out the year.
Yet while crude oil saw wild swings, it was nothing compared to
what investors saw in the fuel’s cousin across the Atlantic, Brent
oil.
This type of oil, which is usually extracted from the North Sea,
generally trades at a discount to its WTI counterpart. This is
largely due to Brent being a heavier version that has more sulfur
which is generally not as prized as the slightly sweeter and
lighter West Texas Intermediate variety. However, this has reversed
in recent months as geopolitical tensions in North Africa and
concerns over other supply regions pushed prices for this type of
oil to fresh highs even though WTI was pretty much flat (see Is
USCI The Best Commodity ETF?).
While some thought that this divergence would begin to disappear
now that the Libyan situation has been resolved, this has not been
the case. Brent has kept its premium over WTI and in some cases,
the level has actually strengthened to where it was a few months
ago. This situation has led Brent oil to outperform WTI so far this
year and to give the commodity its highest average price since the
benchmark was first tracked. In fact, analysts expect prices for
Brent crude to average close to $111/bbl. for the year, crushing
the previous high of $97/bbl. which was set just three years ago.
"Quite simply, we are looking at the highest average price since
the age of oil began," said IHS CERA chairman Daniel Yergin "These
record prices are being driven by the fundamentals of supply,
demand and costs. With rising tensions over Iran, geopolitics are
coming back into the oil price again." (read Three Best Gold
ETFs)
Obviously, these trends are hitting the two key types of oil
very differently, as WTI has experienced some level of weakness
while Brent has managed to surge over the past twelve months. Yet,
Brent oil remains somewhat of an obscure product to most investors
and consumers in the U.S. as WTI tends to be the main oil type that
is quoted in the media and is the main determinant of gasoline
prices in the country. While this may be the case, investors aren’t
entirely closed off from the instrument as they can play Brent oil
cheaply and easily with an oil ETF; the United States Commodity
Funds’ Brent Oil Fund (BNO).
Brent Oil ETF In Focus
This goal of BNO is to track the daily changes in percentage
terms of its units' NAV to reflect the daily changes in percentage
terms of the spot price of Brent crude oil as measured by the
changes in the price of the futures contract on Brent crude oil as
traded on the ICE Futures Exchange, less BNO's expenses. The
product will invest in near month futures contracts except when the
contract is within two weeks of expiration, in which case the next
month’s contract will be bought instead (read ETFs vs. ETNs: What’s
The Difference?).
Thanks to this focus, the fund is, currently, the only
exchange-traded product to follow Brent oil, giving investors
another way to play the space beyond the more traditional choice of
West Texas Intermediate Crude. As one might expect with the
extremely different geopolitical issues impacting the two types,
the performances of the two have been unique over the course of the
year. Since the start of 2011, BNO has gained 14.9% while USO, a
benchmark ETF that tracks WTI futures, has fallen by 7.4% in the
same time period (see Global X Debuts Greece ETF).
Yet, over the past three months, the rolls have reversed as BNO
has underperformed USO by close to 1,000 basis points over the time
period. Should these trends continue, it could be more beneficial
to remain allocated to WTI-based products such as USO. Yet, given
the longer term trends as well as the geopolitical issues impacting
the market on the other side of the Atlantic, now may be the time
to get in on BNO for the long haul.
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