The FT Alphaville blog this morning continues on a theme they've been keen on of late - oil contango and its implications for ETF/ETC investors, who have been aggressive buyers of crude (ETF oil holdings have increased tenfold since November). Izabella Kaminska, the Alphaville author, quotes a Goldman Sachs research piece, in which the bank's analysts suggest that the "large negative carry" in oil—contango—will push the price back down unless spot prices can continue last week's sharp rise.
The Alphaville author goes on, quoting Goldman, to suggest that investors in oil tracker products (ETFs and ETCs) are not be as experienced as their institutional counterparts, who understand the shape of the oil futures curve and the implied carry. To put it bluntly, oil ETF/ETC investors may not know what they're doing.
Is this fair? Leaving aside the fact that Goldman's oil forecasting skills have been, putting it kindly, a little rusty over the last year, do ETF/ETC buyers fit the profile of the classic retail investor, always last in at the peak of a bubble and always selling at market bottoms?
In fact ETC investors seem to have got their oil price timing rather more spot on than Goldman's gurus. While the latter were forecasting $200 per barrel oil, ETC investors were accumulating short oil positions, just ahead of last July's price peak.
And, in recent weeks, after oil prices had fallen from $147 per barrel to the low $40s, ETC investors have, sensibly, switched to the buying tack. You can see the evidence in ETF Securities' press releases of 20 November, 15 December and today.
In fact, according to Nik Bienkowski of ETFS, while contango clearly has an effect on oil returns over time, the simple fact of its presence doesn't mean you shouldn't hold long positions in near-term oil contracts. From May to August 2005, and again from March to July 2007, the near-contract Brent oil ETC (OILB) rose over 30% during periods of negative roll yield. Also, a large contango today doesn't necessarily mean a large contango tomorrow or, more importantly, at the time of the next roll.
So if it's a contest of FT Alphaville and Goldman Sachs versus ETC investors, with the battleground the oil price outlook, I know which side I think has the odds in its favor.