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

Geopolitical conflicts continue to escalate, and the “premium frenzy” of oil and gas ETFs is becoming increasingly intense.

On March 26, the S&P Oil and Gas ETF from Invesco was suspended for one hour in the morning before resuming trading, with the premium rate quickly surpassing 27%, triggering another temporary suspension at noon; the S&P Oil and Gas ETF from Harvest saw its turnover rate soar to 581.49%, with several crude oil LOF products even exceeding a premium rate of 40%.

Beneath the fervor, over 560 premium risk warnings have flooded screens in the past month, and fund companies have all warned that “buying at high premiums may result in significant losses.” Some high-premium products even triggered temporary suspensions multiple times during the month, yet the enthusiasm for capital entry remains unabated. How much longer can this “crazy script” catalyzed by bullets continue?

Deng Hequan, Chief Wealth Advisor at the Market Support and Management Department of China Merchants Fund, believes that the market may present a pattern of “a mix of bearish and bullish factors, with opportunities coexisting with risks” going forward. Overall, he sees market opportunities outweighing risks.

“Historical experience shows that short-term declines caused by geopolitical shocks are often good opportunities for medium- to long-term positioning. Investors can maintain composure amidst market fluctuations, gradually building positions on dips, and should not miss out on the long-term value of quality assets due to short-term panic,” Deng Hequan said, adding that panic selling has never been the optimal response to geopolitical risks.

Premium exceeds 27% and is temporarily suspended again

The ongoing escalation of geopolitical conflicts in the Middle East is pushing oil and gas products into a “high premium vortex.”

On the morning of March 26, after the aforementioned trend of the S&P Oil and Gas ETF from Invesco, the fund issued an urgent announcement at noon, stating that upon application, the fund would implement a temporary suspension from the afternoon opening until the close of that day.

According to Wind data, by the close, the S&P Oil and Gas ETF from Invesco rose 1.59% that day, and despite limited trading hours, the trading volume still exceeded 2.07 billion yuan, with a turnover rate of 164%; the IOPV premium rate reached 27.28%, making it the ETF product with the highest premium rate of the day.

This is not the first time this product has been urgently suspended; the previous day, after being suspended for one hour, the fund’s premium remained high, leading to a full suspension in the afternoon. As of the 26th, the IOPV premium rate for this product had been maintained above 25% for three consecutive days.

Similar situations exist for comparable products. For instance, the S&P Oil and Gas ETF from Harvest also experienced high premiums and high turnover rates. Data shows that the product rose 6.62% that day, with an IOPV premium rate maintained around 14%; however, the total trading volume for the day reached 13.367 billion yuan, nearly a 66% increase compared to the previous day; the turnover rate soared to 581.49%, indicating a fierce level of capital contention.

In addition to cross-border ETFs, several LOF products linked to crude oil and the oil and gas industry have experienced even higher premiums, triggering multiple temporary suspensions throughout the month. Wind data indicates that on March 26, the premium rates for crude oil LOF from E Fund, Harvest, and Southern all exceeded 40%, with daily turnover rates surpassing 100%.

Among them, the Southern crude oil LOF was also temporarily suspended due to high premium issues from the afternoon opening on March 26, while the crude oil LOF from E Fund and Harvest had already triggered similar temporary suspension measures multiple times. Preliminary statistics from Yicai suggest that since March, there have been at least 40 related announcements for temporary suspensions, with products involving crude oil and gas accounting for more than half, becoming a “hotspot” for suspension announcements.

In fact, implementing a second suspension in the afternoon is not a standard operation. “Typically, there is no suspension during trading hours; whether to do so depends on each manager,” a representative from a fund company with related products told Yicai, noting that according to relevant risk control standards, risk warnings and temporary suspension announcements apply when the closing premium rate of an ETF exceeds 10% and that of an LOF exceeds 20%.

In the face of persistently high premiums, risk warnings from fund companies have become almost “daily announcements.” Wind data indicates that as of March 26, there have been over 560 premium risk warning announcements in the past month, with more than 90% involving international QDII products, and some products even repeatedly reminding investors every trading day that “buying at high premiums may face significant losses.”

Even with constant risk warnings, investor enthusiasm has not significantly decreased, and capital continues to flow in. For example, since March 10, the S&P Oil and Gas ETF from Harvest has maintained net inflows of over 10 million yuan every trading day, accumulating 228 million yuan in the past month.

How much longer can the frenzy last?

The extreme premium situation of oil and gas funds this time is fundamentally a result of the escalation of geopolitical conflicts, mismatches in capital supply and demand, and product trading mechanisms, with the ongoing tension in the Middle East being the core trigger igniting this wave of market activity. As the first quarter comes to a close, how will the market perform next?

Regarding the rise in oil prices, Ge Junyang, manager of the Oil ETF from Invesco, told Yicai that the main difference between this round of rising oil prices and the conflict in June last year is that the rise is not solely due to a premium from geopolitical risks but is greatly influenced by Iran’s blockade of the Strait of Hormuz, which significantly impacts global crude oil supply and demand relations.

“The main contention point in the market currently is whether Iran can maintain its blockade of the strait.” Ge Junyang further analyzed that given Iran’s willingness (actively escalating the situation, with oil and gas facilities being attacked in multiple locations) and capability (deterring ships with missiles, and insurance companies canceling war coverage), along with historical experience that often indicates higher intensity at the early stages of a conflict, oil prices may exhibit a tendency to rise easily but fall hard, with high volatility in the short term. The medium-term geopolitical direction remains unpredictable, and once tensions ease, oil prices could quickly adjust.

In terms of investment risk, he also cautioned against excessive trading due to short-term market changes, as the trajectory of macro geopolitical events is difficult to predict, and high volatility can lead to rapid switches between high-level retractions and repricing. In terms of investment targets, commodity and overseas oil and gas equity funds are more sensitive to changes in oil prices.

“From a risk control perspective, it may be worth considering positioning in domestic oil-related funds and suggesting a year-round perspective, waiting to consider when oil prices adjust downward, rather than chasing highs during rapid increases,” Ge Junyang stated, noting that these funds often heavily invest in “the three major oil companies” and leading oil shipping firms, which are expected to leverage the profitability stability and ample cash flow of state-owned oil enterprises while seizing geopolitical opportunities.

Su Jianxiao from Morgan Stanley’s Fund Research Management Department believes that in this geopolitical conflict, crude oil and methanol are the two products most directly affected and with the most significant impact. At this current juncture, the evolution of the conflict between the U.S., Israel, and Iran still exhibits a high level of non-linearity, and the longer the timeline extends, the greater the likelihood of continued upward pulses in crude oil prices.

In the face of market volatility amid geopolitical conflicts, several institutions have provided allocation strategies. Yang Gang, Chief Economist and General Manager of the Equity Research Department at Golden Eagle Fund, told Yicai that energy supply disturbances remain an important pricing variable under the backdrop of geopolitical conflicts. He believes that under the backdrop of rising oil price levels, sectors benefiting from stagflation such as oil and gas development, coal, agricultural chemicals, and breeding may still possess phase-specific allocation value.

Yang Gang also noted that in an environment where geopolitical uncertainties persist, precious metals and some non-ferrous metals may still hold certain allocation value, serving as risk-hedging assets in a portfolio, and may still be positioned after subsequent pullbacks. Overall, he recommends lowering risk tolerance, maintaining geopolitical observation, and maintaining a balanced allocation of “technology + cyclical manufacturing” in the medium term.

Duty Editor: Grace