By Chee Jo-Ey
A supply glut and weakened demand induced by the coronavirus crisis have sent oil prices on a downward spiral. West Texas Intermediate (WTI) oil futures had plunged to negative territory for the first time in history.
According to Affin Hwang research house, this occurred largely due to the expiry of May contracts which require either cash settlement or physical delivery of oil. The latter has been challenging, given fast depleting storage space as demand for oil was ravaged due to the Covid-19 pandemic.
The sell-off was exacerbated by the presence of speculators and passive funds that accepted increasingly lower prices to close out or roll over their futures contract.
In light of this, many investors are viewing the low oil prices and the impact this has had on some companies’ share prices as a buying opportunity.
Traditionally, access to the global oil market has remained difficult for retail investors and largely the preserve of institutions or professional investors.
Investment platform eToro launched a new long oil portfolio today to give retail investors access to the oil market.
The OilWorldWide portfolio will provide retail investors with diversified exposure to 20 global companies across the oil sector, spanning its various stages of production. It also includes oil-related instruments such as two exchange-traded funds (ETFs) and an oil futures contract.
The minimum amount required to invest in the portfolio is US$2,000, and 85% of the portfolio’s allocation covers 20 of the largest oil companies in the world by market capitalisation, with 15% of the portfolio being allocated to oil ETFs as well as oil futures contracts on eToro.
According to eToro CEO and co-founder Yoni Assia, the pandemic has dramatically shifted oil demand and this is having a knock-on effect on oil-dependent industries and companies.
“In response to the strong demand we’ve seen from our client base asking for exposure to this part of the market in a regulated way, we have launched this portfolio.
“We believe that investing should be made as easy as possible for people and markets should be opened up for everyone to invest in a simple and transparent way. Our portfolios enable people to invest in themes and ideas, ranging from 5G technology to gaming and now the oil sector,” he adds.
The next four to six weeks may continue to see storage distress which could lead to a repeat of wild swings in WTI futures for June and July.
US President Donald Trump is looking to increase US strategic reserves including leaving oil underground, but these initiatives will likely need Congressional support. To alleviate pressure on storage, production cuts in North America will need to be more severe.
On the flipside, Brent crude which is the global benchmark for oil is expected to be more stable given that there is no requirement for physical delivery.
However, oil prices are expected to stay weak as supply cuts including those agreed by OPEC (9.7 million barrels per day) is unlikely to be sufficient to mitigate the sharp collapse in demand (20 -35 million barrels per day).
Dr Eric Koh, a senior lecturer in the department of banking and finance at the University of Malaya, however, warns that investing in crude oil comes with volatility risks.
According to Koh, the oil price is currently low not only because of a lower demand caused by the Covid-19 pandemic but also due to a price war triggered by differences in views among certain quarters on managing the appropriate oil production volume.
“If you have spare funds and are knowledgeable about the commodity price dynamics, you may perhaps invest in oil. But this is a commodity that is very sensitive to the changes around it and its price is volatile because it is a major source of energy.
“It is influenced not by mere economic factors but political matters too. So, a layman should be careful in investing in oil unless it is part of a well-diversified portfolio and is managed by experts,” he advises. – April 28, 2020
