Investors are buying into funds that track oil prices at the fastest rate in two years, betting that crude will rebound from a bear market.
The four biggest oil exchange-traded products listed in the U.S. received a combined $334 million this month through Oct. 20, the most since October 2012, according to data compiled by Bloomberg. Shares outstanding in the funds, including the United States Oil Fund and ProShares Ultra Bloomberg Crude Oil, rose to 55.3 million, a nine-month high.
Money has flowed into the funds as West Texas Intermediate and Brent crudes, the benchmarks for U.S. and global oil trading, each plunged more than 20 percent from their June highs, meeting a common definition of a bear market. Banks including BNP Paribas SA and Bank of America Corp. have predicted that the rout in the oil market may soon be over.
“There are investors who love to catch a falling knife,” Dave Nadig, chief investment officer of San Francisco-based ETF.com, an ETF analysis firm, said. “It’s pretty easy to look at what’s been going on in oil and say ‘well, it has to bottom out somewhere.’ There are plenty of investors out there who still believe that the long-term trend of oil has to be $100.”
WTI for December delivery gained 40 cents to $82.89 a barrel at 9:24 a.m. on the New York Mercantile Exchange. Front- month futures fell to $81.78 Oct. 15, the lowest since June 2012. Brent rose 70 cents to $86.92 a barrel on London-based ICE Futures Exchange after sinking to $83.78 on Oct. 15, a four-year low.
U.S. Oil Fund
The U.S. Oil Fund, the biggest oil ETP, received $101.9 million. The fund, which tracks WTI prices, gained 0.5 percent to $31.30 yesterday and is down 11 percent this year. The ProShares fund, which follows the Bloomberg WTI Crude Oil Subindex, saw $192.7 million flow in. Shares rose 1.3 percent to $24.94 yesterday.
The PowerShares DB Oil Fund and the iPath S&P GSCI Crude Oil Total Return Index ETN also had inflows this month.
The ProShares UltraShort Bloomberg Crude Oil, a so-called inverse ETP which gains when the underlying index falls, had an outflow of $93.2 million this month.
Fund investment also increased as volatility rose, said John Hyland, chief investment officer of United States Commodity Futures Funds, an Alameda, California-based ETP manager who manages the U.S. Oil Fund.
The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the U.S. Oil Fund, climbed to 37.23 on Oct. 14, the highest since July 2012, from a record low of 14.50 in June. The gauge was 27.14 yesterday.
“When volatility in oil is low we see less trading and we end up with fewer shares,” Hyland said in an e-mail yesterday. “When volatility is higher we see the reverse.”
Investors in funds tracking U.S. crude are also benefiting from traders paying a premium for near-term delivery. December WTI was 53 cents more expensive than the January contract yesterday. This structure, known as backwardation, allows ETPs like the U.S. Oil Fund to own more barrels of crude each month as it sells the expiring futures and buys the less expensive next-month contract. The value of the fund increases more if futures then rise.
“The structure of the curve in oil has really been the driver of returns for a lot of investors,” Nadig said.
The slump in oil prices came as production in OPEC and the U.S. increases. U.S. oil output will rise next year to the highest since 1970, government data show.
The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, pumped 30.47 million barrels a day in September, the most since August 2013, its monthly report on Oct. 10 showed. The group is scheduled to meet next month in Vienna.
“Everyone is trying to pick a bottom here,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said yesterday. “ETF is the easiest way to get involved in oil. That’s why you are seeing the big inflows. Oil has gone down a little bit too far, too quickly.”
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