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The challenges of oil investing: Contango and the financialization of commodities

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  • Chincarini, Ludwig B.
  • Moneta, Fabio

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.

Suggested Citation

  • Chincarini, Ludwig B. & Moneta, Fabio, 2021. "The challenges of oil investing: Contango and the financialization of commodities," Energy Economics, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:eneeco:v:102:y:2021:i:c:s0140988321003315
    DOI: 10.1016/j.eneco.2021.105443
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    3. Irfan, Muhammad & Rehman, Mubeen Abdur & Razzaq, Asif & Hao, Yu, 2023. "What derives renewable energy transition in G-7 and E-7 countries? The role of financial development and mineral markets," Energy Economics, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Oil investing; Crowding; Futures investing; Tracking error; Commodities; Exchange-traded funds;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G4 - Financial Economics - - Behavioral Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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