Glut instinct: How betting on oil destroyed my pension (for now)

Back in March of this year I, like other would-be speculators, had a cheeky punt on the oil price.
When something has halved in value in the preceding nine months it is natural to take a closer look, so when brent crude appeared to bottom out at around $50 a barrel in March I started thinking about buying in.
Being an amateur stock-picker/asset allocator with an inflated sense of understanding about all things investment (born of ten years as a financial journalist), I believed I had spotted a real opportunity to make a decent return.
Selling my highly lucrative investment in the Schroder Income fund – which had doubled my money in three years – I opted to buy two ETFs which had seen prices tumble in line with the spot price of oil.
Initially success was mine. Oil did indeed rebound. My view that the sell-off had been overdone looked accurate, with my ETFs both climbing around 10% in value. But rather than cash in such a dramatic gain in a little over a month, I got greedy.
Rather than trim back my exposure after such a rapid gain, I stayed invested in one of the most volatile assets available, focusing on a mythical return target I felt I had to reach before I could sell out.
At no point did I check things that a professional investor would have. For example, Kames Capital’s Chief Investment Officer, Stephen Jones, has been bearish on the asset class all year, warning of ongoing headwinds from both the increasingly strong US dollar, but also climbing inventories.
For Jones it all came down to supply and demand – the world is simply becoming more efficient at using oil, reducing the amount we use, while the shale boom in the US has caused supply to jump.
Alas as these factors became evident, my portfolio first retreated back to parity, and then plunged deep into the red.
As the bad news started to roll in my previous crowing in the office about my clear “skill” as an investor left me exposed to the downside – and to some harsh but ultimately well-deserved comments from colleagues.
Headlines such as “Oil price to remain low until 2020” – gleefully flagged to me by co-workers – continue to make for bitter reading today.
Lessons learned:
Why am I sharing this embarrassing tale? It is in the hope that some good can come from my myriad of mistakes.
Firstly, while oil ETFs roughly track the spot price, investors need to be clear they are by no means perfect, still relying on their own underlying price to move in order to deliver returns. Indeed, it is worth noting that you cannot actually “buy” the spot price which you see daily.
Secondly, be aware exactly how your investment works. By owning ETFs to get my oil exposure, rather than stocks or funds, I get a very liquid, easily tradable investment, but there are a number of additional factors to contend with.
Chief amongst these is the roll cost. Because ETFs buy futures contracts rather than actual physical oil, every so often they must buy new contracts to replace expiring ones.
This can work in favour of ETFs if the expected future cost of producing oil is lower than the current oil price, so typically when the spot price is high this will act as a benefit.
However (and I really should have checked this before buying) when oil prices are low, the opposite is likely to happen.
Known as contango, it means you are paying a higher price for the new futures contracts because the expected price of oil in future is higher than the current one.
What it all boils down to – and indeed what has been happening of late – is that traders are buying physical oil at low prices and holding it on tankers, waiting to sell it to the market directly at higher prices in future, rather than offload it now.
For your average ETF investor it is a big problem, pushing up the cost of futures contracts and costing yours truly a sizeable amount every month (the total loss on my pension is currently running at 25%).
Finally, and perhaps most importantly, don’t be greedy. Fund managers will tell you time and again that they take profits on stocks as they go up, rather than having a static price target.
I stubbornly refused to sell when I was up at the beginning, sticking to the staggeringly short-sighted argument that “I hadn’t made enough profit yet”.
Hopefully my experiences have made me – and can make you – a better investor. Certainly it has made me less fixated with a single price goal when it comes to any investments, and that is no bad thing.
But for now, I must return to the daily ritual of monitoring the oil price to see how much more I’ve tumbled into the red. Let’s just hope the cycle turns before my pension runs out.