For Some Oil Still Black Gold – Wall Street Journal

As oil prices plod along, some investors savvy about the market’s quirks are making money, while passive investors are paying a price to ride out the doldrums.

Since early December, oil’s trend has been tedium. Prices have bumbled between about $32 and $50 a barrel on the New York Mercantile Exchange, with many analysts seeing no significant move until refiners work off swollen stockpiles and the economy picks up.

That state of play is bad news for investors who place big bets on direction. But a number of oil traders are trying to capitalize on shifting price differences amid the oil market’s kaleidoscope of crude grades, delivery locations, delivery schedules and types of end products, from gasoline to jet fuel.

BlueGold Capital Management LLP, a $1.2 billion London hedge fund, last year returned 209% by correctly timing oil’s rise and collapse. Lately, Chief Executive Dennis Crema says he sees “lots of opportunities” in so-called relative-value trades.

Such trading can be treacherous if prices go the wrong way. But there have been some winning calls.

An example: With tank capacity nearly maxed out at Cushing, Okla., the point of delivery for Nymex crude, the price of the U.S. benchmark recently fell to an extreme discount to Brent crude, its European counterpart. Anyone who went long Brent and short Nymex crude in December would have made money as Brent’s premium widened to more than $9 a barrel by mid-January.

Similarly, the per-barrel price of Nymex gasoline futures trailed crude late last year, reflecting anemic U.S. gasoline demand. That reversed with the new year, with gasoline futures prices shooting to an $11-a-barrel premium over crude last week. Traders who sold crude and bought gasoline futures late last year would have profited on the “crack,” even though gasoline futures have traded unsteadily.

So while oil prices dropped 6.5% last month, BlueGold, which took advantage of these and other relative-value trades, was up 13%, says Mr. Crema, a former senior trader at Vitol Group, the world’s largest physical oil trader. A year ago he co-founded BlueGold. On Monday, benchmark March Nymex crude settled at $40.08 a barrel, down $1.60 or 3.8%.

[Cracks and Quirks in the Oil Market]

Not everyone stands to gain from the volatile but ultimately directionless price moves. Trend-following funds known as managed futures funds, which typically have a heavy presence in commodities, rose 14% last year as they latched on to definitive price trends. In January their performance was flat, according to preliminary estimates by BarclayHedge Ltd., a hedge fund data tracker. It isn’t related to Barclays PLC.

“Energy is as quiet as we’ve ever seen any market,” says Michael Clarke, president of Clarke Capital Management Inc. in Hinsdale, Ill., a $280 million managed futures firm whose funds rose an average of more than 55% last year. Mr. Clarke says the computer models he uses simply haven’t spotted any good opportunities to re-enter the oil-futures market.

Meanwhile, passive investors in commodities, including pension funds and endowments as well as retail investors through exchange-traded funds, face their own woes in a flat oil market. Last year, many of these investors suffered losses amid the commodities downdraft. The S&P GSCI, a prominent commodity index, declined nearly 47% in 2008 after making fresh records.

The relatively flat oil market is now posing another problem for passive commodities investors, who often invest in a broad basket of commodities that can be heavy on energy. Because oil for imminent delivery currently costs less than contracts for delivery later on, the index-fund managers have to cough up a premium each month to refresh the futures contracts they hold. March Nymex crude closed Monday at a $3.84-a-barrel discount to April. That kind of phenomenon wasn’t a problem when tighter oil inventories pushed spot oil prices higher than future delivery prices.

Still, the passive money hasn’t exactly dried up. Goldman Sachs last week reported index investors now own the equivalent of 837 million barrels of oil, not far below the 1.032 billion barrels they owned when crude prices peaked last July.

Write to Gregory Meyer at greg.meyer@dowjones.com

Printed in The Wall Street Journal, page C1


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