Friday, September 4, 2009

Deutsche warn on the liquidation risk facing commodities (DXO)

From FT Alphaville:

The closure of Deutsche Bank’s Powershares DB Crude Oil Double Long exchange-traded-note this week sent a sizable ripple through both the exchange-traded products and commodities space.

For the commodity markets, specifically, the concern was how prices might react when the fund is forced to liquidate its positions on September 9.

Accordingly, it’s interesting to see that even Deutsche Bank’s own commodities research team appeared a tad concerned about the matter on Friday (H/T the FT’s Gregory Meyer). As the analysts wrote:

The implications of redeeming a fund could have interesting implications for commodity prices, forward curves and volatility. For example, assets under management of the DXO fund stand at roughly USD400m as of September 2. Since the ETN has a two-for-one exposure in the oil market, it has approximately USD800m invested in the WTI July 2010 futures contract. Assuming an oil price of USD68/barrel, this is equivalent to 11,750 futures contracts and consequently exceeds the position accountability levels governing the WTI sweet crude oil futures contract listed on NYMEX.

So essentially, in Deutsche’s opinion, a regulatory-inspired move aimed at curbing oil price volatility will, in the short-term at least, encourage more volatility, not less.

The analysts also keenly pointed out that in the long term, the new regulatory environment could, ironically, increase the appeal for investors to take delivery of commodities. As a result, what has tended to be a financial exposure to commodities might become more physical with, in their view, a more direct impact on commodity prices....MORE