Oil ETF Could Benefit From Yuan Policy Shift

by on June 22, 2010

Global equity markets have been taking their cues from Europe for much of the past three months, as the latest developments in a potential sovereign debt crisis across the pond have set the tone in equity markets around the world. But a surprise announcement out of Beijing on Saturday night stole the spotlight from Europe briefly, as China’s latest policy shift dominated the financial headlines to kick off the last full week of the second quarter.

China’s decision to allow its exchange rate to fluctuate more widely was cheered by economists and government officials around the world, some of whom had accused the country of depressing the value of the yuan to prop up its export market. The yuan revaluation will increase its value against the dollar, which could decrease the trade discrepancy between China and the United States. However, the People’s Bank of China made it clear that it will still maintain control over their currency, noting that “a large fluctuation of the RMB [Renminbi or Chinese yuan] exchange rate would bring considerable shocks to the domestic economic and financial stability, which is not in China´s fundamental interest.”

Some of the winners from the yuan’s new-found freedom were obvious. ETFs offering exposure to the Chinese yuan saw a jump in value (see a complete list of Chinese yuan ETFs). Chinese equity markets finished the day sharply higher, as investors looked beyond the detriment to export-intensive industries and embraced more positive long-term ramifications of a floating currency. Other big exporters, including Korea, Japan, and Germany also stand to benefit, as their goods immediately became more competitive to international consumers.

Other beneficiaries of the news are less obvious; the New Zealand dollar and copper miners got a big boost from the announcement (see Five Unlikely Winners From A Rising Yuan). The new currency policy could also give a boost to oil prices, depending on the magnitude and timing of the yuan’s liberation. China is one of the world’s largest consumers of raw materials, and relies heavily on trading partners to fulfill its insatiable resource appetite. A jump in the buying power of the yuan makes all dollar-denominated commodities immediately more affordable to Chinese industries. That in turn could increase demand for everything from crude oil to copper, boosting prices in the process. Commodity prices rallied to start the week, although the reappearance of euro zone concerns had erased most gains by the time the final bell rang on Monday. Copper, a key metal used in construction and automobiles, had jumped almost 2% on Monday morning while oil climbed about 1.5% to close in on $79 per barrel.

Oil ETF Options

The specifics of China’s yuan policy remain to be seen, and the aftershocks will likely continue to ripple throughout the global economy for weeks to come. ETFs offering exposure to crude oil will be in focus during that time, as investors monitor the impact of a stronger currency on resource demand. Below, we profile three ETFs offering exposure to oil prices:

  • United States Oil Fund (USO): One of the largest exchange-traded commodity products, USO offers exposure to light, sweet crude oil prices by investing in near-month futures contracts. As with any futures-based commodity product, the returns to USO depend not only on movements in spot prices, but the slope of the futures curve as well.
  • United States Brent Oil Fund (BNO): This recently-launched ETF offers exposure to changes in the price of the futures contract on Brent crude oil as traded on the ICE Futures Exchange. The Brent crude oil contract, which trades in U.S. dollars in London, is the second most liquid commodity futures contract in the world; it comes in behind only West Texas Intermediate (WTI) and ahead of gold and natural gas.
  • United States 12 Month Oil (USL): This fund is similar to USO, offering exposure to futures contracts on light sweet crude oil. Unlike USO, however, USL doesn’t concentrate holdings in the next-to-expire contract. USL’s holdings generally consist of the near month contract to expire and the contracts for the following eleven months, for a total of 12 consecutive months’ contracts.

For more actionable ETF investment ideas, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.