Goldman Sachs has stepped forward to warn of unprecedented flows into oil exchange traded funds (ETFs), and it has raised the question of whether investors know what they’re doing.
What’s Behind the Jump? The energy analysts attribute the jump in inflows to a spike in oil prices seen in the last few weeks, plus a cold snap across the United States, storage demand and a jump in refining margins, says Izabella Kaminska for the Alphaville blog at The Financial Times.
In the near-term, though, the analysts expect the price spike to be fleeting and they don’t believe it signals any kind of end to a bear market.
Massive Pullout? Goldman believes that investors are pouring into oil funds while thinking that the commodity was cheap. If a large spike in prices isn’t seen soon, they believe that this will cause investors to pull out of the funds on a sweeping scale. The number of barrels currently owned by investors is only 13% down from the number owned at the top of the market in July 2008.
Who Are the Investors? Goldman also feels that the type of oil investor has changed, and that most inflows are now coming from the retail and private banking sectors, which tend to be more focused on oil prices (as opposed to the institutional investor, which focuses more on the curve shape and implied carry of the position).
Contango Defined. Oil prices are currently in a “negative roll” state, or contango. In contango, the futures price is above the expected future spot price. As a consequence, the price will decline to the spot price before the delivery date.