ETF Securities Ltd. announced plans to launch a second crude oil exchange-traded fund (ETF) onto the London Stock Exchange (LSE). The new fund will track the price of a barrel of West Texas Intermediate (WTI) crude, the dominant grade of crude oil in the United States. It will trade under the ticker symbol OILW. The ETF is expected to list on Thursday, May 11.
ETF Securities already sponsors another ETF on the LSE, OILB, which was the world's first oil ETF and debuted in July 2005. That fund tracks the price of a barrel of Brent crude oil, the dominant grade of oil in Europe.
What's the difference? Technically, WTI oil is a lighter, sweeter grade of crude oil, meaning that it has slightly lower sulphur content than Brent crude. That makes it easier to convert into gasoline, and leads to a slightly higher price on global markets.
But more important from our perpsective is simply the geographical dominance of each grade of oil in local financial markets. WTI has always dominated the oil market in the U.S., while Brent has always dominated in London. For instance, the oil futures contracts that trade on the New York Mercantile Exchange (NYMEX) are based on WTI oil, while London energy traders focus on Brent futures traded on the Intercontinental Exchange (ICE).
Why did ETF Securities launch the new OILW fund?
Graham Tuckwell, Chairman of ETF Securities Limited, said: "We have decided to launch OILW due to strong investor interest in accessing more commodity tracking products. Following the successful launch of OILB investors have asked us to follow it with OILW. We expect strong demand from investors wishing to invest in a product that tracks the oil markets accurately. OILW is another example of ETF Securities' strong product innovation and development."
While many individual investors may not care what grade of oil he or she buys, the ETFs will present tremendous arbitrage opportunities for traders. It doesn't hurt that ICE, the dominant energy exchange in London, recently launched futures contracts tied to WTI oil for the first time. Now, traders will be able to finesse back and forth between the two products. Other London-based investors might prefer exposure to the hugely liquid U.S. market, as WTI futures are the most actively traded futures contract in the world.