Twice daily trading halts fail to dampen investor enthusiasm; why are oil and gas ETFs so "crazy"?

Ask AI · How do escalating geopolitical conflicts spark a premium binge in oil and gas ETFs?

As geopolitical conflicts continue to escalate, the “premium binge” in oil and gas ETFs has become increasingly intense.

On March 26, the S&P Oil & Gas ETF from Invesco Wip (Wip??) resumed trading after being halted for one hour in the morning session; the premium rate still quickly broke above 27%, triggering another temporary halt during the midday. Meanwhile, Harvest Fund’s S&P Oil & Gas ETF saw its turnover rate surge to 581.49%, and many crude oil LOF products also saw their bid-ask premium/discount rates surpass 40%.

Beneath the frantic facade, in the past month alone, more than 560 risk alert notices about premiums have been flooding the screens. Fund companies have all warned that “buying with a high premium could lead to major losses,” and some products with very high premiums even consecutively triggered temporary trading halts within the month. Yet the enthusiasm for new capital has not diminished. How long can this “mad script,” catalyzed by bullets, keep going?

Deng Hequan, Chief Wealth Advisor at Merchants Fund’s Market Support and Management Department, believes that going forward the market may present a pattern of “interwoven negative and positive factors, with both opportunities and risks coexisting.” Overall, opportunities outweigh risks.

“Historical experience shows that the short-term pullbacks caused by geopolitical shocks often become opportunities for medium- to long-term planning. Investors can stay steady amid market volatility and scale into positions on dips, without missing the long-term value of quality assets due to short-term panic.” Deng Hequan said that panic selling has never been the best answer to geopolitical risk.

Premium exceeds 27%—again halted temporarily

The continued escalation of geopolitical conflict in the Middle East is pushing oil and gas-related products into a “high-premium vortex.”

On March 26 in the early session, after the aforementioned moves appeared in the Invesco Wip S&P Oil & Gas ETF, the fund issued an emergency notice mid-day. Upon application, the fund implemented a temporary trading halt from the afternoon market open through the end of the trading day.

Wind data shows that by the close, Invesco Wip’s S&P Oil & Gas ETF rose 1.59% on the day. Even with limited trading hours that day, trading value still exceeded 2.07 billion yuan, and turnover reached 164%. The IOPV premium/discount rate reached 27.28%, making it the ETF product with the highest premium rate for the day.

This is not the first time the product has faced an emergency temporary halt. The previous day, after resuming trading one hour after the morning halt, the fund’s premium level remained stubbornly high; therefore, the fund was halted for the full session after noon. As of the 26th, the product’s IOPV premium/discount rate has stayed above 25% for three consecutive days.

Similar situations also exist among peer products. For example, Harvest’s S&P Oil & Gas ETF also simultaneously showed high premiums and high turnover. Data shows the product rose 6.62% on the day, with the IOPV premium/discount rate remaining around 14%; however, the product’s full-day trading value reached 13.367 billion yuan, an increase of nearly 66% month-on-month versus the previous day. Turnover surged to 581.49%, indicating how intense the capital game has been.

In addition to cross-border ETFs, multiple LOF products linked to crude oil and the oil and gas industry saw even worse “high fever” premium levels, and this month has also triggered intraday temporary halts on multiple occasions. Wind data shows that on March 26, the bid-ask premium/discount rates for the crude oil LOFs—E Fund’s crude oil LOF, Harvest’s crude oil LOF, and Southern’s crude oil LOF—all exceeded 40%, and their single-day turnover rates were all above 100%.

Among them, Southern’s crude oil LOF was also temporarily halted from the afternoon market open on March 26 until the close due to the high premium issue. Before that, E Fund’s crude oil LOF and Harvest’s crude oil LOF had also repeatedly triggered similar temporary halt measures. Caixin Finance’s preliminary statistics indicate that since March, there have been at least more than 40 announcements related to temporary trading halts. Among them, products involving crude oil and oil and gas account for more than half, making it a “high-frequency area” for trading halt announcements.

In fact, implementing another trading halt in the afternoon is not a standard operating procedure. “During the trading day, generally trading is not halted. Whether they do it this way depends on each manager.” A person from a fund company with related products told Caixin Finance that, according to relevant risk-control standards, risk alerts and temporary trading halt announcements apply when an ETF’s closing premium rate exceeds 10%, and when a LOF’s closing premium rate exceeds 20%.

Given the persistently high premium levels, risk alerts from fund companies have become almost “a must every day.” Wind data shows that as of March 26, over the past month there were more than 560 premium risk alert announcements. Among them, international QDII products accounted for more than 90%, and some products even repeatedly reminded investors every trading day that “buying at a high premium may face major losses.”

Even with continuous risk alerts, investor enthusiasm has not clearly cooled, and capital continues to flow in. Taking Harvest’s S&P Oil & Gas ETF as an example, since March 10, it has maintained net inflows of tens of millions of yuan on every trading day; over the past month, it has cumulatively “pulled in” 228 million yuan.

How long can the binge last?

This round of extreme premium conditions in oil and gas funds is, in essence, the combined result of the escalation of geopolitical conflict, a mismatch in capital supply and demand, and product trading mechanisms. With the Middle East situation remaining tense, that is the core fuse igniting this wave of trading. As the first-quarter rally heads toward its end, how will the market play out next?

Regarding the rise in oil prices, Ge Junyang, fund manager of Invesco Wip’s oil ETF, told Caixin Finance that the biggest difference between this round of oil price increases and the Iran-U.S. conflict in June of last year is that this oil price increase is not driven solely by a premium from geopolitical risk. Instead, it is driven by Iran’s blockade of the Strait of Hormuz, which in turn has significantly affected global crude oil supply and demand relationships.

“Right now, the market’s main game centers on whether Iran can continue to blockade the strait.” Ge Junyang further analyzed that, given Iran’s willingness (actively expanding the situation, attacks on oil and gas facilities in multiple locations), its capability (missile deterrence of ships, insurance companies canceling war-risk coverage), and the historical experience that in the early stage of a war the intensity is often higher, in the short term oil prices may show a pattern of rising more easily than falling, with high volatility. Over the medium term, the direction of geopolitics is hard to predict; if it eases, oil prices could quickly retrace.

On investment risk, he also reminded that investors should avoid over-trading due to short-term market changes. Since the trajectory of macro geopolitical events is hard to predict, high volatility can easily trigger a fast-paced switching from high-level drawdowns to repricing. In terms of investment targets, commodities and overseas oil and gas stock funds are more sensitive to changes in oil prices.

“From the perspective of risk control, investors could consider allocating to domestic oil-related funds, and it’s recommended to look at them over a full-year horizon—waiting to consider after the oil price center of gravity declines, rather than chasing upside during a rapid spike.” Ge Junyang said that these funds often hold heavy positions in “the three barrels oil” majors and leading oil shipping companies, which may help capture geopolitical opportunities while leveraging the advantages of profit stability and abundant cash flow of China’s oil state-owned enterprises.

Su Jianxiao from Morgan Stanley Fund’s Research and Management Department believes that in this geopolitical conflict, crude oil and methanol are the two most directly affected products, with the largest impact. At the current stage, the evolution path of the U.S.-Iran conflict still has a high degree of nonlinearity; and as time goes on, the likelihood that crude oil will continue its pulse upward becomes greater.

Faced with market volatility under geopolitical conflict, multiple institutions have provided asset allocation ideas. Yang Gang, Chief Economist and General Manager of Equity Research Department at Eagle Fund, told Caixin Finance that under geopolitical conflict, energy supply disruptions remain an important pricing variable. He believes that with oil prices’ center of gravity rising, the price-increase chain that benefits from delayed inflation—such as oil and gas development, coal, agrochemical fertilizers, and livestock breeding—may still have value for phased allocation.

Yang Gang also believes that in an environment where geopolitical uncertainty still exists, precious metals and some non-ferrous metals may still have certain allocation value. As risk-hedging assets in a portfolio, they could still be considered after subsequent pullbacks. Overall, he suggests reducing risk appetite, maintaining geopolitical observation, and keeping a balanced allocation of “technology + cycle manufacturing” over the medium term.

(This article comes from Caixin Finance)