COVID-19: Investing in Oil, in a Crisis | FTI Consulting

COVID-19: Investing in Oil, in a Crisis

Impacts on Oil Futures and ETPs

Economic Consulting | Financial Institutions

July 9, 2020

Oil Drill

The COVID-19 outbreak has resulted in unprecedented shocks to the world economy and a particularly hard hit to the global oil market. The recent changes in the supply and demand balance for physical and financial exposure to oil have led to extreme oil price volatility and had material repercussions for financial instruments linked to these prices.

Forwards and futures are often used by investors who desire financial exposure to oil, whether for hedging or speculation, but not physical oil. Physically settled WTI crude front-month futures went negative for the first time in history on 20 April 2020 due to weak market fundamentals and a looming crisis in storage capacity.

The recent oil price volatility attracted investors to oil exchange traded products. Fund managers saw increases in their assets under management and had to roll larger positions when the futures neared expiry. For the United States Oil Fund, this led to a mismatch between its traded price and net asset value per share; higher rolling costs; changes in mandate; and challenges to achieving its investments objectives due to counterparty limits.

The volatility has also posed significant risks for Oil ETPs. For certain leveraged WisdomTree ETPs, the volatility triggered intraday rebalancing ⁠— offering loss protection but also impeding the ability to recuperate losses — and mandated redemptions, which lock in losses for investors.

Given the extreme oil price movements and losses suffered on associated complex financial products, we anticipate disputes, or other needs for support assessing and managing the financial impacts, could arise.


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