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By Bloomberg

Oil bulls may be better off buying stocks and currencies, according to Societe Generale SA.

While U.S. crude has jumped 27 percent from a six-year low in March, returns are being eroded by a market structure called contango, whereby contracts for delivery in coming weeks are lower than later ones. Investors wanting to bet on prices rising need to sell the cheaper, expiring contracts at the end of each month and buy more expensive futures, reducing gains because of what’s known as a negative roll yield.

Bullish investors can avoid this conundrum by instead buying a combination of oil-related equities and currencies including the Canadian dollar or Mexican peso, according to the French bank, which forecasts crude will continue to advance this year as U.S. production slows and demand accelerates.

“When the curve switches into contango, you get out of oil,” Mark Keenan, the Singapore-based head of commodities research for Asia at SocGen, said by phone on Monday. “It’s very difficult to make any money.”

Switching out of oil into a portfolio of stocks and currencies during periods of contango could have returned a cumulated 47 percent since 2006, compared with a loss of 61 percent for West Texas Intermediate futures, according to a SocGen report on Monday.

WTI has been in contango since November, with the most prompt prices trading at an average of about $1 below those for delivery the following month, data compiled by Bloomberg show. For about 10 months prior to that, the market was in backwardation, when near-term contracts were more expensive.

Contango Cost

The cost of contango can be illustrated by the performance of exchange traded funds such as the U.S. Oil Fund, which track futures while incorporating the cost of the negative roll yield, as well as fees. The ETF is down 2.6 percent this year while WTI is up about 5 percent.

During periods of contango, SocGen recommends investing in oil companies that benefit from the structure, or a mixture of equities and currencies of crude-producing countries including the Norwegian krone and Russia’s ruble.

“That solution takes a basket and calculates the best combination of equities and currencies to track the price of oil as precisely as possible,” Keenan said. Dividend income from the equities and interest from the currencies provide additional return, he said.

No Worries

When the market’s backwardated, investors benefit from the difference in prices thanks to a positive roll yield. During these periods, SocGen says holding crude futures or shares in an oil ETF is more beneficial. WTI traded at an average premium of 60 cents in a 10-month period of backwardation through May 2008. The benchmark climbed 72 percent in the period while the U.S. Oil Fund jumped 85 percent.

“During those times when the oil market is in backwardation, you stick with your crude exposure and there’s absolutely nothing to worry about and life just couldn’t be any better,” Keenan said.