Forget WTI, Play Crude with This Oil ETF


"This type of oil, which is usually extracted from the North Sea, generally trades at a discount to its WTI counterpart."

In what was yet another strange year for oil, prices for the vital commodity moved across the board throughout 2011. WTI crude surged in the first four months of the year only to tumble throughout the summer, reading a low below $77/bbl in early October. After this nadir, WTI took off; gaining about $20/bbl before experiencing some volatile trading to close out the year. Yet while crude oil saw wild swings, it was nothing compared to what investors saw in the fuel's cousin across the Atlantic, Brent oil.

This type of oil, which is usually extracted from the North Sea, generally trades at a discount to its WTI counterpart. This is largely due to Brent being a heavier version that has more sulfur, which is generally not as prized as the slightly sweeter and lighter West Texas Intermediate variety. However, this has reversed in recent months as geopolitical tensions in North Africa and concerns over other supply regions pushed prices for this type of oil to fresh highs even though WTI was pretty much flat (see Is USCI The Best Commodity ETF?).

While some thought that this divergence would begin to disappear now that the Libyan situation has been resolved, this has not been the case. Brent has kept its premium over WTI and in some cases, the level has actually strengthened to where it was a few months ago. This situation has led Brent oil to outperform WTI so far this year and to give the commodity its highest average price since the benchmark was first tracked. In fact, analysts expect prices for Brent crude to average close to $111/bbl for the year, crushing the previous high of $97/bbl, which was set just three years ago. "Quite simply, we are looking at the highest average price since the age of oil began," said IHS CERA chairman Daniel Yergin. "These record prices are being driven by the fundamentals of supply, demand and costs. With rising tensions over Iran, geopolitics are coming back into the oil price again." (read Three Best Gold ETFs).

Obviously, these trends are hitting the two key types of oil very differently, as WTI has experienced some level of weakness while Brent has managed to surge over the past twelve months. Yet, Brent oil remains somewhat of an obscure product to most investors and consumers in the U.S. as WTI tends to be the main oil type that is quoted in the media and is the main determinant of gasoline prices in the country. While this may be the case, investors aren't entirely closed off from the instrument as they can play Brent oil cheaply and easily with an oil ETF; the United States Commodity Funds' Brent Oil Fund (BNO).

Brent Oil ETF In Focus
This goal of BNO is to track the daily changes in percentage terms of its units' NAV to reflect the daily changes in percentage terms of the spot price of Brent crude oil as measured by the changes in the price of the futures contract on Brent crude oil as traded on the ICE Futures Exchange, less BNO's expenses. The product will invest in near month futures contracts except when the contract is within two weeks of expiration, in which case the next month's contract will be bought instead (read ETFs vs. ETNs: What's The Difference?).

Thanks to this focus, the fund is, currently, the only exchange-traded product to follow Brent oil, giving investors another way to play the space beyond the more traditional choice of West Texas Intermediate Crude. As one might expect with the extremely different geopolitical issues impacting the two types, the performances of the two have been unique over the course of the year. Since the start of 2011, BNO has gained 14.9% while USO, a benchmark ETF that tracks WTI futures, has fallen by 7.4% in the same time period (see Global X Debuts Greece ETF).

Yet, over the past three months, the rolls have reversed as BNO has underperformed USO by close to 1,000 basis points over the time period. Should these trends continue, it could be more beneficial to remain allocated to WTI-based products such as USO. Yet, given the longer-term trends as well as the geopolitical issues impacting the market on the other side of the Atlantic, now may be the time to get in on BNO for the long haul.

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