Shedding light on domestic oil prices

New ETF tracks WCS

If you were to ask most Canadian investors for the rough price of oil today, more often than not, the answer would be somewhere close to US$59.15 a barrel, Friday’s closing price of West Texas Intermediate, the world’s most popular crude stream settled in Cushing, Okla.

Very few, on the other hand, would quote US$50, the approximate price for western Canadian Select, a heavy oil stream produced in Western Canada and shipped from Hardisty, Alta.

That’s because, while many Canadian oilsands producers sell at WCS prices, the country’s crude stream has always lacked the transparency and liquidity necessary to make it a household name with investors in the country.

But Tim Pickering, CEO of Calgary-based hedge fund Auspice Capital Advisors, wants to change that with the creation of a new exchange traded fund, which he hopes will provide greater, more direct access to the Canadian crude market.

“If you have a view on Canadian oil, looking at WTI or Brent prices is not representative of that,” he said in an interview in Toronto. “So we’re giving investors a tool to finally exercise that view.”

The new Auspice ETF, the firm’s first, is expected to launch any day now, pending regulatory approval and will trade in Toronto under the ticker symbol CCX.

It will track the performance of the firm’s Canadian Crude Excess Return Index, created last year by Auspice as a gauge of WCS futures.

“I think it’s a great addition,” said Tim Simard, head of commodities at the National Bank of Canada. “If things pan out, we will see more visibility for a price that most investors should have an idea about.”

This is particularly true, Simard said, for those who are buying shares in Canadian oilsands companies because WCS is the benchmark most large producers who have heavy oil as part of their production slate.

“If you are looking at the performance of a Canadian Natural Resources Ltd., or Cenovus Energy Inc., or Northern Blizzard Resources Inc., or Pengrowth Energy Corp., or Twin

It’s almost like we’re closer to the floor on WCS than we are WTI

Butte Energy Ltd., or a host of others, a big part of their exposure will be to heavy crude,” he said.

At the same time, Simard believes having access to a vehicle that provides direct WCS exposure provides a good opportunity for investors who want to exploit a crude stream that has some interesting different fundamental attributes than the conventional WTI barrel.

Right now, one of the only ways to take a position in oil is to use an ETF that is tied to WTI, said Simard, noting the most common exchange traded fund in this regard is the United States Oil Fund LP (USO) listed in New York.

“If you’re bullish on oil and reasonably confident that the differential between Canadian crude and U.S. crude is going to remain constant for the next little while, then if oil does go up, you’ll get a bigger bang for your buck out of being long the WCS contract than you will a WTI-based ETF,” he said, noting a rise of $10 in the current price of the former would generate a greater percentage return than a similar $10 rise in the latter.

Simard added that investors may also benefit from greater downside protection in taking a position on WCS rather than WTI prices. “You can make the argument that the first barrels to be turned off in a low-price environment are heavy barrels, so it’s almost like we’re closer to the floor on WCS than we are for WTI,” he said.

Ultimately, investors will have more choice to decide how they want to play their view on oil, said Pickering of his new ETF.