The energy transition is underway. Around the globe, new wind turbines are coming into operation and photovoltaic modules are being installed. "In most markets, solar or wind now represents the cheapest available source of new electricity generation," the International Energy Agency (IEA) states in its "World Energy Outlook 2021". However, the agency reckons that investment in the sustainable transformation of the energy supply is still far too low. The world is, consequently, more reliant on fossil fuels than ever. This dependence is clear from the upturn following the coronavirus recession. "2021 will see a strong recovery in coal and oil consumption," the IEA concludes. Although demand is rising, the producer countries grouped in OPEC+ have so far held back on increasing production, while the sector in the USA was hit hard by the recent hurricane season.
These conflicting elements have led to a veritable energy crisis – which in turn is stoking inflation, as it were. An uptick in prices can also and especially be deduced from futures contracts for crude oil. A barrel of North Sea Brent now costs a good USD 85 – almost two thirds more than at the end of 2020. Although West Texas Intermediate (WTI) traditionally trades at a discount on Brent, the difference is currently around USD 3 per barrel. When it comes to performance, however, the US oil grade is certainly not lagging behind the North Sea variant (see chart). Leonteq is now bringing these two quotations together for an interesting new issue. The capital protection certificate on WTI and Brent offers a risk-reduced entry into the bullish oil market. At the end of the three-year term the capital is 90% protected. At the same time, the product participates in rising quotations. The participation factor is 100%.
The "worst of" principle is applied when calculating the repayment. This means that the underlying with the weaker performance based on the initial fixing is determinative. Given the high correlation of WTI and Brent, it is not expected that there will be any great discrepancy between the two underlyings. Should oil prices fall, the capital protection would kick in anyhow. The 90% mark is always the starting point for calculating the repayment, regardless of how the two energy sources trend. Assuming the weaker commodities contract declines 20% in the next three years, 90% of the certificate would be repaid. The same applies if the worst performer should halve. Whatever the case, the risk of loss is limited to one tenth of the denomination.
What happens if the weaker underlying ends the term up 20%? While in this case the 90% mark would likewise signify the starting point for the calculation, the strike at 90% of the initial level also comes into play then. The option prevailing for the participation is thus already trading well in the money when the certificate is issued. Given this "edge", the structured product participates fully in the gain of the prevailing underlying. In the example outlined – the worst performer appreciates by a fifth – a repayment of 120% of the nominal would therefore be due. To conclude, the new capital protection certificate offers the possibility of a somewhat cautious entry into the oil market. If the rally continues, holders of the product will benefit. Should oil suffer an "energy drop", however, the risk of loss would be heavily curtailed. Although the market is currently experiencing a sort of "perfect storm", there are downside risks. OPEC+ could, for instance, dampen prices by significantly upping production. On the demand side, a weakening of the current economic upturn would probably also put a dent in prices.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.