More than 100 million barrels of oil are consumed across the world every day. This figure alone shows just how important – despite all the decarbonisation initiatives – the fossil fuel is for the global economy. For businesses and consumers, a glance at the financial section of the newspaper or the relevant websites is enough to gain a picture of the current value of oil. The price of a barrel of Brent, the North Sea crude, is a firm fixture in many media. Different prices are quoted, though. Alongside the spot price, these include options and the forward contracts known as futures. These confer the right (options) to have a specified quantity of a commodity supplied in a defined quality on a fixed date for a specified price or the obligation (futures) to procure a specified quantity of a commodity in a defined quality on a fixed date and pay for it. Investors usually have no interest in the actual delivery, which is why they are reliant on replacing an expiring future with a equivalent having a later maturity date.
The Leonteq Brent Crude Oil Futures Total Return Index also follows this pattern. The benchmark offers access to the Brent crude futures contract traded on the Intercontinental Exchange, or ICE for short. There is a periodic rollover process in which the underlying future is replaced by one with the next due date. Given the different prices being quoted for the relevant futures contracts, this procedure can typically influence the value of the index regardless of the actual movement in the price of Brent. As soon as the targeted future exceeds the value of the one that is expiring, rollover losses are incurred because the released capital is not sufficient for a complete replacement. This is known in the jargon as being in “contango”. The opposite is “backwardation”, where the price of the commodity falls the further in the future the maturity of the contract or the delivery date is.
Brent has found itself in backwardation for a long time because of the latent concerns that the energy source will become scarcer. In such a situation market players are willing to pay a premium for the short-term availability of the commodity. Although the Leonteq Brent Crude Oil Futures Total Return Index has only been calculated for two months, this backwardation has already had an impact, with the new underlying having performed some 1.4 percentage points better than the price of the commodity itself. The total return approach also played a part in this: alongside the daily movement of the prevailing futures, interest in the form of the United States Secured Overnight Financing Rate (SOFR) also flows into the calculation. Investors should not assume that this rate will remain at its current high level of over 5%. The same applies when it comes to the futures curve, which can at any time move into a contango that would be disadvantageous for the index calculation.
On the other hand, investors can rely on a robust product structure. Leonteq tracks the Brent Index in an ETP wrapper. A pledge is deposited with SIX SIS AG for this exchange-traded product. The depositary agent ensures that investors have access to these funds in the event of the issuer becoming insolvent. Measures are also taken to ensure that the collateral is sufficiently large: SIX Repo AG undertakes a daily review and valuation of the securities. In addition to the reduced issuer risk, Leonteq scores points thanks to its solid equity base, an investment grade rating from Fitch, regulation by FINMA and a long track record: the Zurich finance boutique has been issuing structured products successfully for more than 15 years. Despite these quality features, the ETP+ on the Leonteq Brent Crude Oil Futures Total Return Index comes with a management fee of just 0.45% p.a.
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