ETF Trends
ETF Trends

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.

Oil Consumption. ETF provider PowerShares hosted a webcast yesterday with BP Capital Management Founder and Chairman T. Boone Pickens, who had some interesting points to make about the commodity:

  • Since 1970, our dependence on imported oil has shot up from 24% to nearly 70%
  • The world oil consumption on a daily basis is 85 million barrels; 21 million of that is the United States (but we’re only 4% of the world’s population)
  • The United States has other resources at its disposal – particularly, wind

If we don’t change our habits soon, the price spikes in oil that we’ve witnessed in the past will almost certainly return to haunt us.

Spotty Forecasts. Paul Amery over at Index Universe wonders if the question of whether oil ETF investors know what they’re doing is a fair one to ask. He notes that Goldman’s oil forecasting skills haven’t been spot on lately – the predicted $200 a barrel last May. However, they also called $100 a barrel a few years ago, so make of that what you will.

Amery also notes that exchange traded product investors were gathering short oil positions just ahead of the peak; now they’re switching back to buying.

Investors Are Smart. We have to agree with Amery – today’s investors are smart, educated and careful in their research. Thanks to the internet, the transparency of ETFs and the overall accessibility of necessary information, the majority of investors are arming themselves with knowledge before getting into the markets.

The best way to protect yourself is with both an entry and an exit strategy. Have it ready at all times.

  • United States 12 Month Oil (USL): down 4.9% year-to-date, up 0.3% in the last month. This fund approaches futures by buying the near-month contract and rolling it over into the next month as each contract expires. Investments are spread out over 12 months of contracts, bought in equal amounts.

United States Oil USL ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.