Tracking Brent Crude is more lucrative as Calpers learns to its cost

25th July 2011

As the Financial Times reports the fund which provides retirement and health benefits to 1.6m people, has posted record returns this year, though it is still down long term due to the financial crisis. But FT journalist Gregory Meyer says the huge fund has arguably made one big mistake.

The fund, as with many pension funds, has a huge stake in commodities, but as part of this strategy has decided not to try and actively manage any exposure, but to track an index in this case the Standard & Poors' GSCI. However for its exposure to oil, the GSCI weights the US measure of crude oil prices US West Texas Intermediate Crude and has less exposure to the London-priced Brent Crude. For reasons that are the subject of quite intense debate, Brent Crude has been trading at a record $20 difference.

Had the managers of Calpers made an active decision to adjust its exposure to the London index, it could have seen much higher returns and, when it comes to pensions, every basis point counts.

The FT quotes analysts at Barclays saying the GSCI ‘surrendered' a spectacular $25bn less by having more of its weighting on the American side of the Atlantic.

Analysts are trying to understand what is happening and this Wall Street Journal blog considers a Goldman Sachs report on the issue. The investment bank believes that the price difference may be down to something as simple as differences in supply and demand.

David Greely, the author of the report and head of the Goldman's energy research group believes the difference may be due partly to the disruption of Libyan supplies and some disruptions to the supply from Shell's Nigerian pipeline.

However he also thinks the rise of the emerging economies may be playing a part.

He is quoted as saying: "It could be a reflection (that) the demand pull is originating in the emerging markets such as China."

On the Oil Drum website, Gail the Actuary puts it all down to pipelines in the US which are bringing lots of oil in from both the Mexican Gulf and Canada.

She writes: "It is really the conflict between the oil coming up from the Gulf and the oil from the North that is leading to excessive crude oil supply for Midwest refineries and the resulting lower price for WTI crude oil at Cushing. Demand for output from the refineries remains high though, so prices for refined products remains high, even as prices for crude oil are low. This mismatch provides an opportunity for refiners to make high profits."

So it may well be about higher profits for oil companies. But what about retail investors? Well, if you have invested in oil, either in a broader fund, or in a commodity tracking ETF it may well be worth having a look to see what it is invested in.

ETFs usually track indices too but investors make sure they understand what is being tracked and this example underlines why.

Further information:

Here is a link to the Calpers website.

And from last year, This is Money discusses how to invest in oil.

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