Oil and gas fund premiums remain high—how long can this "celebration" last?

Against the backdrop of ongoing turmoil in the Middle East, international oil prices have experienced significant fluctuations, and domestic oil and gas themed funds have staged a continuous “premium frenzy.” Although there was a clear correction in on-market prices on March 25, the premium rates of many oil and gas funds remained at historically high levels.

When investor enthusiasm for chasing gains intertwines with expectations of geopolitical conflicts, how long can this “premium frenzy” last? Several institutions have given remarkably consistent advice: approach rationally and be cautious about chasing high.

High Premium Levels

Wind data shows that as of the close on March 25, the premium rate for E Fund’s crude oil LOF reached 41.01%, Harvest’s crude oil LOF was 40.32%, and Southern’s crude oil LOF was 34.38%. In the ETF sector, the premium rate for GF’s S&P Oil & Gas ETF was 26.16%, ranking first among all ETFs in the market.

However, compared to the previous trading day, the premiums have already declined. On March 24, the premiums for E Fund’s crude oil LOF and Harvest’s crude oil LOF were as high as 57.73% and 55.90%, respectively. Southern’s crude oil LOF and Hu’an’s S&P Global Oil ETF had premiums of 49.32% and 28.17%, respectively, and GF’s S&P Oil & Gas ETF’s premium was 28.75%. As on-market prices generally hit the limit down on March 25, these funds’ premium levels narrowed.

From a monthly performance perspective, oil and gas funds have seen astonishing gains. As of March 25, Harvest’s crude oil LOF rose 77.37% in the month, E Fund’s crude oil LOF and Southern’s crude oil LOF increased by 66.28% and 59.97%, respectively, and GF’s S&P Oil & Gas ETF also gained 42.58%.

Taking Southern’s crude oil LOF as an example, as of March 20, the fund had risen 47.25% over the past two weeks and a total of 110.22% since the beginning of the year. Recently, signs of easing in the Middle East situation have emerged, and market sentiment has shifted markedly. International oil prices have dropped significantly; the fund hit the limit down on March 25, and on the same day, E Fund’s crude oil LOF and Harvest’s crude oil LOF also hit the limit down.

In response to the persistently high premiums, fund companies have issued multiple risk warnings. On the evening of March 25, E Fund’s crude oil LOF, Hu’an’s S&P Global Oil LOF, Harvest’s crude oil LOF, and Harvest’s S&P Oil & Gas ETF all issued notices warning of premium risks. Notably, E Fund has issued 18 warnings within the month about premium risks and suspensions, nearly every trading day reminding investors that buying at high premiums may lead to significant losses.

Geopolitical Conflicts as the Main Driver

The core driver behind this round of high premiums in oil and gas funds is the ongoing escalation of tensions in the Middle East. Before this conflict erupted, on February 27, Brent crude was only $73.21 per barrel. By March 9, it surged to a peak of $119.50 per barrel, a 63% increase. In recent days, oil prices have retreated; on March 24, they closed at $95.96 per barrel, and as of press time on March 25, they remained around $94.

Guotai Fund analysts believe that the recent performance of oil and gas funds has been mainly influenced by the Middle East situation.

“Although international oil prices have retreated from earlier highs, they still fluctuate at high levels,” said Guotai Fund. They noted that current oil prices mainly revolve around the US-Iran conflict. On one hand, conflicts in the Middle East have shifted toward energy infrastructure, heightening concerns over oil supply; on the other hand, the US has managed market expectations by temporarily lifting sanctions on Russia and Iran and signaling negotiations with Iran, which has exerted some downward pressure on prices.

Zeng Fangfang, head of product operations at PaoPao Network Wealth, pointed out that on March 25, due to Brent crude still being below $100 per barrel, oil and gas ETFs showed a downward trend. Although some related on-market products continued to be suspended, the premiums of previously hotly traded varieties remained high.

“Escalation of Middle East conflicts has heightened expectations of supply disruptions, causing oil prices to rise rapidly,” Zeng Fangfang said. This strong upward expectation attracted a large influx of short-term capital into oil and gas theme funds. Especially since some oil and gas QDII funds have exhausted their foreign exchange quotas, and their off-market subscription channels are strictly closed or limited, funds optimistic about oil prices have shifted into on-market products, fueling the chase and pushing premiums higher.

Gao Xiao-min, a researcher at GeShang Fund, analyzed that the high premiums behind oil and gas funds are partly due to the sharp volatility of international oil prices. To ensure smooth operation and protect investors’ interests, crude oil LOF funds have suspended subscriptions. Meanwhile, as the Middle East conflict escalates and market expectations of rising oil prices grow, investors are actively buying on the market, causing supply and demand to become unbalanced and further pushing up premiums. Due to geopolitical shocks and QDII quota restrictions, crude oil LOF premiums may remain high in the short term. As geopolitical risks ease later, premiums are expected to gradually converge.

Hidden Concerns Behind High Premiums

Regarding the outlook, Guotai Fund believes that the high volatility of crude oil prices is likely to persist. “Current geopolitical uncertainties are significant, and oil and gas funds are prone to large fluctuations influenced by international situations. Investors should remain rational, avoid chasing highs, and implement proper risk controls.”

Zeng Fangfang stated that although international oil prices may stay high in the short term due to geopolitical conflicts, the risks for oil and gas funds themselves—especially those with high premiums on the market—have accumulated rapidly. High premiums are unsustainable; once conflicts ease or supply and demand improve, premiums will quickly revert to net asset values.

The essence of high premiums is a serious divergence between price and value. Simply put, a premium means investors buy at a price significantly above the fund’s actual net asset value. For example, on March 24, the premium rate for E Fund’s crude oil LOF once reached 57.73%, Harvest’s was 55.90%, and Southern’s was 49.32%. This implies investors bought fund shares worth 100 yuan at over 150 yuan, with more than 50 yuan being “bubble.”

An industry insider pointed out that secondary market trading prices often deviate from fund NAV due to supply and demand. When buying interest exceeds selling interest, prices can rise above the real-time NAV, creating a premium. However, in the long run, prices tend to revert to value. Short-term demand surges are difficult to sustain. Currently, crude oil prices are mainly driven by capital flows. Once buying momentum weakens or supply pressures ease, premiums will narrow or even disappear, and investors entering at high levels may face significant losses.

Gao Xiao-min reminded that crude oil LOF funds currently exhibit high premiums and high volatility, and the combined risks of premiums and market fluctuations could lead to substantial losses. It is advisable for investors to avoid chasing highs and wait for premiums to converge before considering entry.

Zeng Fangfang suggested that investors who have bought at high premiums could consider reducing positions or exiting to lower the risk of premium decline. For off-market investors still interested in oil and gas, they can monitor the subscription channels of off-market linked funds or wait until premiums fall before evaluating entry timing. Given the volatility of commodities, a phased approach with stop-profit levels is recommended to avoid heavy losses from a single large position.

Boshi Fund manager Wang Xiang also noted that the macro geopolitical situation is unpredictable, and reversals are common. Under high volatility, the oil and gas sector may experience rapid re-pricing and retracements. “Investors should treat it as a strategic allocation, avoiding excessive short-term trading driven by emotions.”

(Author: Special Correspondent Pang Huawei | Editor: Zhang Xing)