Page 1 of 3 Earlier this week, U.S. Commodity Funds—best known for its $1.7 billion U.S. Oil Fund (NYSE Arca: USO) and $2.8 billion U.S. Natural Gas Fund (NYSE Arca: UNG)—launched the country's first ETF holding non-U.S.-produced crude oil. The new fund, the U.S. Brent Oil Fund (NYSE Arca: BNO), focuses on Brent crude, a light sweet oil produced in Europe's North Sea. After WTI Crude, Brent futures are the second-most liquid commodity contract in the world, and Brent is often used as a pricing benchmark for much of the world's oil. Shortly after launch, HAI Associate Editor Lara Crigger sat down with USCF's chief investment officer and portfolio manager, John T. Hyland, to discuss the new fund, as well as why investors should start thinking about their oil exposure in global terms. Crigger: So why invest in Brent crude oil over WTI? Isn't all oil the same? Hyland: Admittedly, owning WTI contracts at the front end of the futures curve is quite similar to owning Brent contracts at the front end of the futures curve. But there are a few ways in which they can be different. Even though the prices of Brent and WTI tend to move in close synchronization, Brent prices are a bit more attuned to the global market, while WTI is more attuned to the North American market. Even though the majority of American investors will probably be more interested in the American component, we think some will have an interest in looking outside the U.S. for exposure. Also, WTI is sometimes impacted more by storage constraints in Cushing, Okla. If the storage capacity in Cushing starts to fill up, then that can have an impact on the shape of the futures curve for the WTI contract, because it's based out of there. So the front month or two of WTI oil could be in a flatter backwardation or steeper contango than oil elsewhere, simply because of the storage issue. Crigger: And since Brent is carried by tanker, it wouldn't be subject to the same single-point storage concerns. Hyland: Precisely. So, clearly, there will be some times when that dynamic would favor Brent over WTI, and maybe there will be times when WTI would be favored over Brent. We're not saying that for all times and all purposes, one is better than the other. People often ask me which is the better fund, USO or USL? Well, that's the wrong question. Clearly, there will be times when it will be better to be exposed to the front end of the curve, and other times when it's better to be exposed to the 12-month curve. Likewise, there will be times when Brent will be less in contango or more in backwardation than WTI, and the other way around. So we view the funds as more tools for an investment toolbox. I mean, compared to where we are with equities or even fixed income in the ETF space, the commodity area is still filling in some of its basic tool set. Just four years ago, if you wanted oil exposure, you had one choice: USO, at the front end of the WTI curve. And obviously that's still a popular place to be, because it trades 20, 30 million shares on a good day. But now, four years later, you can be there; you can be spread across 12 months; you can be floating or inverse or double up; and now you can be in non-WTI—Brent.
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