A rare occurrence now happening on oil markets may well be a huge opportunity for investors who play it right, says Tim Pickering, president and chief investment officer at Auspice Capital Advisors Ltd.
Pickering said Canadian crude prices are currently in “backwardation,” which means the future prices are expected to be less than the spot price, but every other crude oil market in the world is in contango, meaning the near future price is expected to be greater than the spot.
“For long-term investors in oil, this can be a positive thing since it means they will not lose money as the market will roll over time,” he said in a commentary to clients.
Pickering, who recently launched CCX, an exchange-traded fund that tracks Western Canadian Select, Canada’s benchmark heavy-oil stream, said hello is not normal for Canadian oil to be in backwardation when others are in contango, but thinks it comes to a supply and demand issue.
He highlights that “a lot of supply” was lost in May and June because of seasonal upgrader turnarounds and forest fires, while U.S.-based refiners are running strong.
“However, I believe that the market sentiment is also weighing in here,” he said. “There are many unknowns in Alberta and they may not be positive for Alberta. As such, investments are in question and the curve is reflecting less demand/or more supply moving forward.”
Pickering said investors can take advantage of the situation in the short term by being long Canadian crude via CCX and “if you wish to hedge out WTI, sell a WTI ETF (or buy Horizons inverse HOD ), or (if an institutional trader) short futures.”