The Challenges of Oil Investing: Contango and the Financialization of Commodities

56 Pages Posted: 23 May 2021 Last revised: 10 Feb 2022

See all articles by Ludwig B. Chincarini

Ludwig B. Chincarini

University of San Francisco

Fabio Moneta

Telfer School of Management, University of Ottawa

Date Written: April 21, 2021

Abstract

The ability of oil investment vehicles to perfectly track spot oil has always been challenging; however, recently many vehicles have underperformed spot oil. We study the behavior of oil futures and exchange-traded products that invest in oil futures to document and understand the source of this tracking error. The primary reason why oil investment vehicles have underperformed spot oil is an increase in contango in oil futures markets that we find might be related to investment crowding and the financialization of commodity markets. We show that from 2006 to 2017, oil futures investing underperformed spot oil and the market was in contango most of the time. Proxies for crowding, such as the concentration of major oil investors and changes in assets under management and fund flows of major oil exchange-traded products, are associated with contango in the futures markets and the divergence between futures and spot returns. We also provide evidence of an impact of the financialization on oil futures prices.

Keywords: oil investing, crowding, futures investing, tracking error, commodities, exchange-traded funds

JEL Classification: G0,G4,G11,G14

Suggested Citation

Chincarini, Ludwig B. and Moneta, Fabio, The Challenges of Oil Investing: Contango and the Financialization of Commodities (April 21, 2021). Energy Economics, Vol. 102, 2021, Available at SSRN: https://ssrn.com/abstract=3849464 or http://dx.doi.org/10.2139/ssrn.3849464

Ludwig B. Chincarini (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

Fabio Moneta

Telfer School of Management, University of Ottawa ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

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