Surprisingly, the flow of crude oil is still accelerating, much like the money going into crude oil funds. Three of the largest crude oil funds include USO, OIL, and UCO. UCO is unique due to the fact that it’s an exchange-traded fund that uses leverage, mostly in the form of derivatives, to correspond to twice (200%) the daily performance of its underlying benchmark, the Bloomberg WTI Crude Oil Sub-index. Since the fund corresponds to 2X the daily performance rather than total performance of its underlying index, mainly day traders, hedge funds, and speculators predicting an oil rebound would invest in such a risky investment. Considering that UCO has a total return of -81.29% since June 2014, the rewards are great for those investing in this fund in a crude oil bull market; however as the statistic shows, a leveraged fund could also destroy a portfolio if their predictions are wrong.
With the fears of oil inventories rising to record levels and OPEC refusing to cut its production, the price of crude oil is still facing global downward pressure. Bearing in mind these factors, there seems to be no clear sign of a bull market for crude oil in sight. Nonetheless, not everyone agrees with what the market is doing. Many large financial institutions have large stakes in UCO and thus are still betting that crude oil can make a comeback beginning in 2015. Related: Oilfield Services Facing Years Of Decline
Let’s examine the top ten firms with the greatest stake in UCO, based on information from each firm’s 2014 4th quarter 13Fs.
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The amount of money that these bulge bracket hedge funds and asset management firms are pumping into the crude oil market, more specifically UCO, is astounding. The risks of investing in a leveraged-ETF cannot be stressed enough. Losing 81% of a client’s portfolio would damage a firm’s reputation beyond repair. Even so, many firms are still choosing to invest hundreds of thousands and in Goldman Sachs’s case, millions in UCO overlooking the fact that the ETF tends to move between 5- 20% on a daily basis these days.
Analysts’ 2015 predictions for crude oil have ranged from $30 to an average of about $60 per barrel of WTI crude oil. With the current price of $49 and considering the massive oil glut, most investors are still bearish on crude oil. Contrarians such as Goldman Sachs and Deutsche AG are not as bearish based on a few projections. Quite frankly, Goldman Sachs does not see the current price of oil as being sustainable. The firm expects the global oil industry to face a loss of $1 trillion over the next decade if the price remains below $60 per barrel. Besides this, contrarians are also expecting conflicts in the Middle-East to play a large role in boosting the price of crude oil through a reduction in supply channels. Related: Is Warren Buffett Wrong About Oil Stocks?
As a retail investor, it can sometimes be challenging to understand all of the moving pieces surrounding our investments, especially without access to an expensive wealth advisor. Thus, by observing where institutional investors are putting their money, retail investors may be able to get a sense of what both the market is doing as well as contrarians. Based on the fact that the most recent 13F displayed major holdings from the 2014 4th quarter, the upcoming 13F set to be released in May, will be a major determinant of each firm’s current outlook for crude oil which is something to key an eye on.
By Henry T. for Oilprice.com
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