Structured products linked to oil are booming in Germany on the back of the fall in the oil price, which has almost halved in the past six months - the sharpest drop since the economic recession of 2008. The result has been a dramatic increase in issuance of certificates linked to Brent crude oil, which has quickly become one of the most popular underlyings in Germany.
In January 2015, when North Sea Brent crude oil spot prices averaged $48 per barrel, no fewer than 5,525 structured products were linked to oil, the vast majority of which were leverage certificates (4,844), according to SRP data. Six months earlier, in August 2014, when the price of Brent hovered around $105 per barrel, only 1,379 structured products issued in Germany were linked to the oil price.
"Obviously when oil prices were falling, it became an attractive opportunity," said Klaus von Massenbach (pictured), cross asset solutions, institutional sales and marketing for Austria and Germany at Societe Generale. "Oil became an interesting alternative because equity markets are high, interest rates are not very attractive, so [oil] became a topic that makes sense from an economic point of view and also from a story point of view because it is easy to communicate."
At Commerzbank, certificates linked to oil are also a top theme. "Since the fall in the oil price, we have seen that more and more investors positioning themselves in oil and the majority are hoping for a recovery of the oil price," said Anouch Wilhelms, director, equity markets & commodities, public distribution at Commerzbank.
There is an incredible demand for oil as an underlying in the certificates market, said Wilhelms. "Brent crude oil is, after the Dax, the second most popular underlying in Germany," he said. "Most investors take positions relating to the rise of the oil price."
It remains to be seen if the trend will continue now that the oil price appears to have bottomed out, said Massenbach. "That's the difference between a structured product and an asset management product: you have to take a view at the time," said Massenbach. "Of course, one can assume that in a couple of years' time there is a reasonable chance that the oil price will be higher than today."
The question is more around how you structure a product "because now, as oil prices are not in backwardation, but in contango - where the futures (or forward) price of a commodity is higher than the expected spot price - it becomes increasingly difficult to show interesting products," said Massenbach.
"You can see this in futures, where the market has expected the demand for oil will increase," said Wilhelms. "This has gone a little bit quicker than we expected. But in recent weeks we have seen what the analysts have predicted and that is that the oil price has stabilised."
However, it is not clear if the trend has reversed, said Wilhelms. "Many companies, when they buy oil, they do not buy oil today when they need it today, but they buy today for December or for middle of next year and fix the price today," said Wilhelms. "It takes a certain time before the fall in the oil price is expressed in numbers as a certain amount of pre-hedging has already been made."
Related stories:
Sharp rise in turnover in Germany as commodities catch on
Commerz debuts Shake Shack turbos, as crude oil gains traction
SG bolsters equity derivatives platform in Germany
German investors cash in on certificates