Crude oil rises in the east, contangos in the west

Posted on: February 16, 2011 in: Uncategorized with 0 comments

Crude oil prices are rising. But to profit, you need to take a slight detour. For the one-page PDF, click here.
There are two obstacles to investing in crude. First, the crude that is rising is Brent Crude from off the British coast. Not the WTI or West Texas Intermediate that trades in North America. Brent is up 10% year-to-date. WTI is down 9%. Brent usually at a discount to WTI, is at a $20 premium. (That premium will narrow but the historical relationship has weakened since 2005 as the chart here shows.) While there are some thinly-traded Brent Crude ETFs traded in Europe, there are not any here or in the US.
The second obstacle is contango. Order a barrel of oil for delivery today and it will cost you about $85. Order one for delivery in a month and it will be $85 plus storage and other costs. That extra cost is contango. Crude oil ETFs like USO and OIL buy futures contracts on WTI. Futures contracts expire and are replaced. Every time that happens, contango takes a bite. Since Dec 2009, USO is down 10%. WTI is up about 5%.
Rather than an oil ETF, with our longer view, we prefer ETFs that invests in oil producers who naturally have exposure to WTI, Brent and other petro sources and pay dividends. Two are: the SPDR Energy Select (XLE) for exposure to US oil majors, many with international operations; and the iShares TSX Energy (XEG) for exposure to Canadian oil producers.

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