In case you didn’t catch the news, the Financial Times revealed this week that Exchange Traded Funds (ETFs) now control almost a third of the most active US oil futures contracts. Why is this important? Well, according to the FT, this is turning smaller investors into a ‘muscular force’ on global commodities markets.
That’s because retail investors can now get access to commodity futures contracts through ETFs that trade on the stock exchange. That makes buying and selling commodities incredibly easy. Previously, the only way to gain exposure to futures contracts was on the commodity exchanges. And historically, commodity trading has been the preserve of mostly hedge funds and the trading desks of the major investment banks.
ETFs have changed all that, and in this case, for the worse. Here’s why: ‘Money has flooded into funds tracking West Texas Intermediate crude this year as investors try to pick a bottom.’
This looks like the herd rushing into the slaughterhouse. There is little reason to be buying oil right now, from either a trading (technical) perspective or a fundamental one. The US is awash in so much oil they are worried about where they can store it all. Higher oil prices aren’t coming back for a while yet.
And for the real clincher, here’s this from the FT…
‘Investors buying and holding an oil ETF have the odds stacked against them. This is because WTI prices slope upward for future delivery dates, meaning the funds can afford fewer barrels of oil each time they sell an expiring month’s contract and buy a new one. Goldman Sachs warned that “any upside to price returns is being significantly eroded by losses on roll yields”.’
As my finance mate Akhil Patel commented, when even Goldman Sachs is warning you that you’re about to get shafted, you really know you’re in trouble!
for The Daily Reckoning Australia