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Tugboats nudging a 300,000-ton very large crude carrier (VLCC) to a shipyard on the Yangtze River for retrofitting in Qidong city in eastern China’s Jiangsu province on March 16, 2020. Photo: Chinatopix via AP.

Oil ETFs are on a roll as energy crunch helps exchange traded funds outshine all other investments

  • Mirae’s Global X S&P Crude Oil Futures ETF returned investors 48.6 per cent this year while the Samsung S&P GSCI Crude Oil Futures ETF returned 52 per cent
  • The two oil funds were the top performers out of 100 funds traded in Hong Kong, according to Morningstar

Exchange-traded funds (ETFs) that track crude oil futures have been the top performers this year compared to other financial instruments, most of them returning over 40 per cent since January, as a supply crunch kept spot prices ahead of futures.

Investors have sold and took profit on the two crude oil ETFs in Hong Kong and four in mainland China with US$430 million in combined assets, riding on this year’s rebound in oil prices that reached seven-year highs several times.

ETF managers gained handsomely this year from backwardation, the market condition where oil futures trade below the expected spot price in a downwards sloping futures curve. They would roll their futures exposure forward, pocketing the spread as returns for their funds. Unlike stocks, futures contracts expire, requiring them to be rolled over to keep the fund running.

“Under backwardation, it is more expensive to buy crude oil today for immediate delivery than crude oil that will be delivered several months out,” said Victor Cheung, a director and ETF Product specialist at Mirae Asset Global Investments (Hong Kong). “We believe the high spot price was reflecting stronger than expected demand due to economic recovery and supply shock.”
A chart showing the spot price of West Texas Intermediate (WTI) crude oil above declining futures prices for delivery in March and December 2022. Source: Bloomberg

Spot crude oil prices have risen 44 per cent this year to US$69.49 per barrel in Cushing, Oklahoma, boosted by a sharp uptick in global demand as the world economy recovers from the Covid-19 pandemic. West Texas Intermediate (WTI) futures for December delivery rose 75 per cent for the year to October to US$83.42 a barrel, the highest since 2014.

Some analysts expect oil prices to go even higher. JPMorgan raised its 2022 oil price forecast in late November to US$125 per barrel and US$150 per barrel in 2023. The spread of the new Covid-19 variant Omicron in late November has halted the recent gains in oil prices.

A worker on the Kantan No. 3 offshore oil platform in the northern waters of the South China Sea on July 25, 2020. Photo: Xinhua

Mirae’s HK$68.6 million (US$8.8 million) Global X S&P Crude Oil Futures ETF returned investors 48.6 per cent this year while the Samsung S&P GSCI Crude Oil Futures ETF, at HK$1.3 billion, returned 52 per cent, making them the two top performers out of 100 funds traded in Hong Kong, according to Morningstar. By comparison, Mirae’s Global X China Electric Vehicle and Battery ETF returned 45.9 per cent in the top spot among equity-linked funds.

Returns of the four listed funds trading on the Shanghai and Shenzhen exchanges are equally strong. These four funds, such as the 244 million yuan (US$38.4 million) Crude Oil Fund managed by E Fund Asset Management, and the 732 million yuan Southern Crude Oil Fund managed by China Southern Asset Management, invest in offshore ETFs.

The two funds ranked as the top-sixth and seventh fund this year among the over 360 China domiciled funds that invest into offshore securities tracked by Morningstar.

Aerial photo taken on Feb. 21, 2021 shows the Bozhong 13-2 field, which is situated in the middle of the Bohai Sea, 140km away from north China’s Tianjin Municipality. Photo: Handout via Xinhua

Unlike mutual funds whose trading is limited to once per day, investors in an ETF can buy and sell the fund’s unit on exchange anytime during trading hours on the local exchange, making profit taking easier for investors, said Carmen Cheung, head of ETF and passive investment at Samsung Asset Management (Hong Kong).

“ETFs provide real time liquidity that enable one to buy and sell at discretion,” said Cheung. “The outflow could be attributed to oil price trading at a higher level compared to a year ago, and this incentivises investors to lock in profits.”

Not all managers are bullish on oil. CSOP Asset Management, the Hong Kong subsidiary of Southern Asset Management, launched its first inverse oil ETF product on the Hong Kong stock exchange this month. The inverse ETF seeks to deliver returns when oil price drops, losing out when oil gains.

Last year’s unprecedented and surprise plunge below zero of WTI crude oil contracts when May contracts changed hands at minus US$40.32 on April 20 served as a recent example of how oil prices still face “unprecedented uncertainties” due to repeated Covid-19 outbreaks, said Wang Yi, head of quantitative investment at CSOP Asset Management.

“The commodity super cycle is boosted by the major central banks’ stimulation [policies], which drives global demand,” Wang said. “With more central banks exiting stimulation measures, we are facing a more challenging and complicated recovery from Covid-19.”

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