How Best to Invest in Oil?
July 27, 2016 - Commodity Futures
How should investors think about investing in crude oil? In their June 2016 paper entitled “Understanding Oil Investing”, Ludwig Chincarini, John Love and Robert Nguyen examine oil investing, with emphasis on differences in behaviors between non-investable spot oil and investable crude oil futures. They consider several approaches to futures, all fully collateralized by cash (one-month U.S. Treasury bills):
- Simple systematic rolling – Select a contract series (nearest, 2nd, 3rd… from expiration) and systematically roll from one contract in the series to the next at a specified time before expiration (0, 1, 3, 5, 10, 13… days).
- Binary signaled rolling (Strategy 1) – Acquire/roll to the next contract in a series only when the series is in backwardation (has positive roll yield) and otherwise hold cash.
- Highest roll yield (Strategy 2) – Acquire/roll to the one of the nearest, 2nd or 3rd contract with the highest backwardation (or lowest contango) on a specified roll date.
They also examine the behaviors of crude oil exchange-traded funds (ETF). Using daily spot West Texas Intermediate (WTI) crude oil price and WTI crude oil futures prices, volumes and open interest during 1983 through 2015 (focusing on 1994-2015 and 2005-2015), and crude oil ETF prices from inceptions through early 2016, they find that: Keep Reading