NCPA - National Center for Policy Analysis

Retail Investors May Chase Oil at a Risk

March 27, 2015

Retail investors have organized and become a whale in the oil market. Analysts and certain fund managers warn that the fat returns of the previous decade are over and the long period of tightness in markets from oil to copper that drove these returns, has rumbled to a halt.

  • After withdrawing $50 billion from commodities in 2013 and another $28 billion in 2014, passive investors pumped a net $9.5 billion into commodities through mid-March.
  • A big recipient of these inflows has been Exchange Trade Fund's tracking oil as prices slumped towards $40 a barrel.
  • The US Oil Fund has absorbed a net $2 billion this year.

The Bloomberg Commodity Index returned more than 10 percent in several of the boom years. In each of the past four years, it has recorded losses. In 2015, the index is down another 3.9 percent.

Commodities traders once enhanced returns by trading around the money flows that accompanied the monthly rolling of futures-based index products such as Exchange Trade-Funds (ETF). Now that easy money has been arbitraged away.

The $36.4 billion Harvard University endowment — a cynosure of the fund management world — this year cut commodities' price of its target portfolio to zero, down from 8 per cent in 2008.

The exit of Harvard comes just as correlations between commodities and equities break down. One barometer of the commodity doldrums is the lack of public outcry over the "speculative investors."

Source: Gregory Meyer, "Oil market's small fry become big fish," Financial Times, March 26, 2015.


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