Iran tensions push oil ETCs/ETNs higher

Jan 8th, 2012 | By | Category: Commodities

We’re just one trading week into 2012 and oil, having risen 5.5% to over $113/bbl (Brent), is back in the headlines. A number of factors, economic and geopolitical, are behind the sharp rise.

Oil ETCs/ETNs rise on Iran tensions and improved economic data

Iran has threatened to use military force to block the Strait of Hormuz, through which 35% of all seaborne traded oil flows.

The past month has seen a dramatic increase in tensions in the Gulf region, primarily as Iran has reacted to the new US and proposed EU sanctions aimed at curbing its oil exports in response to the alleged military dimension of the country’s nuclear programme.

The impact of US and EU bans could be exacerbated by an ongoing dispute between Beijing and Tehran which has caused China to halve its imports of Iranian oil this month and to do so again in February.

These actions have led to threats from leading Iranian figures to use military force to block the Strait of Hormuz in retaliation. In a further escalation, Iran test-fired what it described as two long-range missiles following a naval exercise in the Gulf region.

Located between Oman and Iran, the Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Hormuz is the world’s most important oil chokepoint due to its daily oil flow of almost 17 million barrels in 2011. Flows through the Strait in the last year were roughly 35% of all seaborne traded oil, equivalent to about 20 percent of oil traded worldwide.

While many doubt whether Iran would actually carry out such a threat, Western officials are concerned that, as diplomatic language intensifies and economic pressures mount on a divided Iranian regime, its leaders could misstep or miscalculate and act irrationally, thus sparking conflict in the region.

Even if Iran were to keep a cool head (relatively speaking), a more subtle approach than trying to block the Strait could be to drive up marine insurance premiums and, therefore, oil prices by a combination of strong rhetoric and low-level harassment of cargo ships and tankers passing through the Strait.

All in all, the market’s reaction to recent events appears to be about right. But, as tensions concerning Iran persist, from a geopolitical perspective, the pressure seems to be on the upside – further gains would not be unexpected.

Furthermore, Iranian interference in Iraq – where the governance and security situation has in any case deteriorated since the US withdrawal – could yet threaten oil output there.

FEATURED PRODUCTS

Source Crude Oil Enhanced T-ETC

DB Brent Crude Oil Booster GBP ETC

DB WTI Crude Oil Booster USD ETC

RBS Oil Trendpilot ETN

Barclays iPath Pure Beta Crude Oil ETN

Barclays iPath S&P GSCI Crude Oil ETN

ETFS WTI Crude Oil ETC

iShares S&P Commodity Producers Oil & Gas ETF

Lyxor MSCI World Energy USD ETF

Amundi MSCI Europe Energy ETF

Meanwhile, on the economic front, recent data out of the US and China has also been bullish for oil. The US and Chinese economies both look to be growing more than most analysts anticipated.

In the US, for example, payrolls rose 200,000 in December, double the gain in November; a weekly measure of consumer confidence ended 2011 at a five-month high; and manufacturers reported their business in December grew at the fastest pace in six months

Data out of China related to the manufacturing sector, and showed that activity there had expanded moderately in December, easing fears that the world’s second-largest economy was slowing sharply.

Signs that the global economy may be improving is positive for oil because, among other things, during times of expansion more lorries trudge the highways, more cargo ships traverse the seas and more people fill up their petrol tanks.

All these factors, when combined with the secular emerging-market growth story and the well-documented long-term supply constraints (i.e. all the easy oil in the world has already been found), bode well for the price of oil.

For investors wishing to gain exposure to oil, there are a number of exchange traded products to choose from, tracking a range of different oil and energy markets.

Oil ETC/ETNs:

Source Crude Oil Enhanced T-ETC
The Source Crude Oil Enhanced T-ETC aims to track the performance of the S&P GSCI Crude Oil Enhanced Index. This Index seeks to optimise its tracking of spot crude oil price movements by minimising the impact of futures roll costs. It does this by dynamically changing the futures on which it rolls.

DB Brent Crude Oil Booster GBP Hedged ETC
This ETC tracks the DB Brent Crude Oil Booster GBP Index and is intended to reflect the performance of Brent Crude Oil futures. The selection of the future contracts is based on the Deutsche Bank’s proprietary ‘Booster Method’ which seeks to minimise the negative roll yield in contango markets (known as roll costs), or maximise the benefits (in backwardated markets) of replacing contracts approaching expiry with longer dated contracts.

DB WTI Crude Oil Booster USD Hedged ETC
This ETC tracks the DB WTI Crude Oil Booster USD Index and is intended to reflect the performance of WTI Crude Oil futures. The selection of the future contracts is based on the Deutsche Bank’s proprietary ‘Booster Method’ to minimise roll costs (see above).

RBS Oil Trendpilot ETN
The RBS Oil Trendpilot ETN utilises a systematic trend-following strategy to provide exposure to either the RBS 12-Month Oil Total Return Index (based on WTI Crude Oil futures) or the yield on a hypothetical notional investment in 3-month US Treasury bills, depending on the relative performance of the Oil Index on a simple historical moving average basis.

Barclays iPath Pure Beta Crude Oil ETN
The iPath Pure Beta Crude Oil ETN is linked to the Barclays Capital Crude Oil Pure Beta TR Index. This index aims to track the performance of an investment in WTI crude oil futures contracts. The Index may roll into one of a number of futures contracts with varying expiration dates, so as to mitigate the effects of negative roll yield (roll costs) when in futures are in contango.

Barclays iPath S&P GSCI Crude Oil Total Return Index ETN
iPath S&P GSCI Crude Oil Total Return Index ETN tracks the S&P GSCI Crude Oil Total Return Index which reflects an investment in the West Texas Intermediate (WTI) crude oil futures contract plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.

ETFS WTI Crude Oil ETC
The ETF Securities ETFS WTI Crude Oil ETC aims to track the performance of the DJ-UBS WTI Crude Oil Sub-Index on a total return basis. The Index tracks a rolling, fully collateralised investment in near month oil future.

For investors wishing to stick to equities, there are a number of ETFs to consider:

iShares S&P Commodity Producers Oil and Gas ETF

Lyxor MSCI World Energy USD ETF

Amundi MSCI Europe Energy ETF

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