To participate during a possible oil and gas surge, one could invest in either company stocks or energy price futures. The clever strategy of two Vontobel energy indices makes use of both options in phases – and is successful.
There are basically two ways of taking advantage of a possible upswing within the energy sector. On the one hand, one could invest within the stocks of promising oil and gas companies and thus participate during a possible rise in prices. But one could also choose the more direct route and participate during a possible rise in energy prices. Shares are often “deposited” relatively easily and cheaply. this is often often harder with energy raw materials, because oil and co. would wish to be stored in properly sealed containers during the investment period, which is said to great effort and high costs.
In order to avoid physical delivery and storage with oil and gas investments, one usually resorts to the futures market . Futures can then be invested within the specified energy commodity via futures exchanges. Futures are standardized exchange-traded futures contracts during which the date for the physical delivery of the raw materials is agreed at a later point in time (maturity date). If a future is on the brink of its maturity , it’s sold shortly before its expiration date and thus the proceeds are invested during a replacement derivative with a later maturity . The physical delivery is “postponed” to a later point in time – the new maturity . One also speaks of a “rolling process”, because whenever before a future is due,
Contango describes a market situation during which the price of the energy price futures with a extended term is quoted at a far better level than the corresponding future with a shorter term. The forward curve is thus rising. If a future that’s on the brink of expire is “rolled” into a future with a maturity at a later maturity , this constellation leads to rollover losses, because the proceeds from the sale of the expiring contracts are now – initially value-neutral – in additional expensive and thus in less Contracts when it had been before the roll.
there is a possible loss, i.e. a possible disadvantage for the investor
In the case of backwardation, the opposite is true: contracts with a later maturity are listed below those with a shorter maturity. this is often often why one speaks of a falling commodity term curve. If, during a backwardation situation, a future that’s on the brink of mature is “rolled” into a future with a later maturity , so-called roll profits are created. They arise because the proceeds from the sale of the expiring contracts are now invested – initially during a value-neutral manner – in cheaper and thus in additional contracts than was the case before the roll process. a possible profit and thus a possible advantage for the investor
There are many reasons why the market anticipates higher or lower prices for the long run via forward rates. as an example , an acute short-term shortage of oil can cause the short-term derivative becoming costlier in regard to the longer-term contracts (backwardation) or oil reserves becoming scarcer and thus costlier within the longer term (contango).
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