By QuandryFX
- DBO has a stellar methodology which is currently allowing it to earn strong roll yield due to the backwardation in the WTI futures market.
- Crude production growth has collapsed and prices will need to go higher for it to revive.
- Crude imports are slated to remain weak until OPEC removes its cuts – and these cuts likely won’t be removed until prices are higher.
Returning 25% on a year-to-date basis, the Invesco DB Oil ETF (DBO) has crushed it this year on the back of strength seen in crude markets.
It is my belief that for the oil bulls, the party is just getting started, and in that in the coming months, we will see DBO continue its trend higher.
Understanding DBO ETF
When I cover oil market ETFs and ETNs, I tend to start my articles with a discussion about what exactly the examined instrument does and how it works. The reason I do this is because there are many different approaches to giving exposure to the oil markets and differences between methodologies can result in dramatically different returns over time.
Related: ETF Trends Top 34 Oil ETFs List
The Invesco DB Oil ETF is one of my favorite oil market funds due to how it manages roll yield. The basic idea behind roll yield is that in most time periods, prices of futures contracts tend to be approaching the price of the front-month contract. This means that the way in which a strategy handles its rolling (moving exposure into later months to avoid expiry of the front-month futures contract) will impact returns.
Let’s graphically walk through the forward curve to understand this.
The above chart shows the current WTI futures curve. At present, the market is in what is called backwardation in that the front contracts are priced higher than the back contracts. This results in positive roll yield when exposure is held in futures contracts beyond the front-month because as time progresses, back month contracts will be increasing in value in an approach towards the front-month contract.