Now Trading: U.S. Commodity Funds' Brent Oil ETF

Jun. 3.10 | About: The United (BNO)

By Patrick Watson

With offshore oil drilling in the headlines – and not in a good way – now might seem like a curious time to launch another crude oil product. Yet the world needs oil, regardless how much of it spills into the sea. Wednesday (6/2/10) marked the launch of United States Brent Oil Fund (NYSEARCA:BNO) for those who want to speculate on world oil prices.

BNO comes from United States Commodity Funds, a pioneer in the commodity ETF niche. The firm now offers eight energy-related funds covering crude oil (BNO, USO and USL), inverse crude oil (NYSEARCA:DNO), natural gas (UNG and UNL), heating oil (NYSEARCA:UHN) and gasoline (NYSEARCA:UGA).

BNO differs from similar products in the particular type of oil futures it seeks to track. Brent crude comes from Britain’s North Sea and is priced at the port of Sullum Voe in the Shetland Islands. The more familiar West Texas Intermediate crude is priced for delivery at Cushing, Oklahoma. While both contracts follow a similar course over time, they can vary in the short-term. This, the sponsor must hope, will provide a reason for traders to use BNO. I’m not so sure; anyone sophisticated enough to care about the difference between Brent crude and Light Sweet crude is probably sophisticated enough to have a futures account. We’ll see.

The BNO launch my also be related to the CFTC crackdown on speculative position limits that has reduced the potential asset base for such funds. If USO and USL need to close to new investments, the firm will have BNO available to keep gathering assets.

I will also be interested to see how BNO handles the “roll risk” problem that has plagued other futures-based products. BNO will own futures positions in the current and next contract months. This means that once a month the fund will need to sell its position and replace it with another one two months out. No matter how adeptly this is done, small losses are common in such transactions. Over time they add up, and it is a major reason funds like USO have had a hard time tracking the oil price over long periods.

For more information, visit the BNO Summary Page.

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.