Question: Which single raw material has so far this year given a return to investors of 5.2%, 7.2%, 18.4%, 18.8%, 19.1%, 19.7%, 21.3%, 23.3%, 24.8%, 27.3% and 33.1%?

Answer: Oil, in the form of different exchange-traded products.

What proportion of the underlying commodity’s spot price movement have the ETFs/ETCs therefore returned? Between 7% and 40%, it turns out. Here are the levels of the key oil market benchmarks on the same start and end dates and the percentage price change over the 10-month period.

And what’s the reason for the diversity of the ETC returns and the shortfall when compared to the spot price return? The shape of the oil futures curve and the contango that has prevailed in 2009 are the key factors (contango describes a futures curve when contracts with a later expiry date trade at a premium to nearer-term ones).

The chart below, provided by ETF Securities, shows how periods of contango and backwardation (the opposite state of affairs) have alternated since 1997. The y-axis gives the historical 12-month moving average roll yield between the front month and next month futures in the Brent Oil market. Between 1997 and 2008 this ranged from around -2% to +2.75% per month, or up to -21%/+38% on an annualised basis.

However, early in 2009 (beyond the x-axis scale of this chart), the oil market moved into what has been described as “super contango”. Next month NYMEX WTI crude oil traded at a record US$8 premium to the front month contract in both January and February this year, representing a massive 68% on an annualised basis, according to columnist John Kemp of Reuters. Although this premium shrank to around 7% by late October, contango has reigned all year.

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