Source tackles oil correlation gap

Source has launched T-ETC, the first enhanced oil product to be offered in the European exchange-traded product market. “The big issue in oil is the shape of the curve, and everyone has a different way of dealing with that,” says Michael John Lytle, director of marketing at Source.

The US Treasury Bill commodity product is linked to the S&P GSCI Crude Oil Enhanced index, which adjusts exposure to the futures curve each month, moving between the front-month and six-month futures contract depending on the steepness of the curve. “If you buy WTI at the front end of the curve and roll your futures because the curve has been steeply contagoed this year, you take a hit once a month. You can’t avoid this,” says Lytle.

“People have tried going further along the curve, to the two-, three- and six-month, and the one-, two- and three-year points. This approach may work for periods of time, but if you adopt these strategies you are taking a view on both the spot price and the shape of the curve. Spot may perform according to your expectations but the curve may not. Spot can rise while the one-year future remains relatively static. Most investors simply want to express their view on spot and not the curve,” he says.

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