Oil and Gas Fund Premium Soars: How Long Can This "Boom" Last?

21st Century Business Herald Special Correspondent Pang Huawei

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 noticeable correction in intraday prices on March 25, the premium rates of many oil and gas funds remain at historic highs.

As 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 prices.

High Premium Levels

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

However, compared to the previous trading day, premiums have already declined. On March 24, the premiums of E Fund’s crude oil LOF and China Asset Management’s crude oil LOF soared to 57.73% and 55.90%, respectively. Southern Oil LOF and Hua’an S&P Global Oil ETF had premiums of 49.32% and 28.17%, and GF’s S&P Oil & Gas ETF was at 28.75%. With intraday prices generally hitting the limit down on March 25, these funds’ premium levels have narrowed.

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

Taking Southern Oil LOF as an example, as of March 20, the fund had risen 47.25% in the past two weeks and a total of 110.22% year-to-date. Recently, signs of easing in Middle East tensions have emerged, market sentiment has shifted noticeably, and international oil prices have dropped sharply. The fund hit the limit down on March 25, and on the same day, E Fund’s crude oil LOF and China Asset Management’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, Hua’an S&P Global Oil LOF, China Asset Management’s crude oil LOF, and China Asset Management’s S&P Oil & Gas ETF all issued notices warning of premium risks. Notably, E Fund has issued 18 such warnings within the month, nearly daily reminding investors that buying at high premiums may lead to significant losses.

Geopolitical Conflicts as the Main Driver

The core driver behind the high premiums of this round of 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, closing at $95.96 on March 24, and as of press time on March 25, hovering around $94.

Guotai Fund analysis indicates that the recent performance of oil and gas funds has been mainly influenced by Middle East developments.

“Although international oil prices have retreated from earlier highs, they still fluctuate at high levels,” Guotai Fund said. Currently, oil prices mainly trade around US-Iraq conflicts. On one hand, conflicts shifting toward energy infrastructure have heightened concerns over oil supply; on the other hand, the US has managed market expectations by temporarily lifting sanctions on Russia and Iran’s oil exports and signaling negotiations with Iran, which has exerted some downward pressure on prices.

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

“Escalation of Middle East conflicts has increased expectations of supply disruptions, causing oil prices to rise rapidly,” Zeng said. This strong upward expectation attracted a large influx of short-term capital into oil and gas themed funds. Especially some oil and gas QDII funds, due to exhausted foreign exchange quotas and strict restrictions or limits on off-exchange subscriptions, saw funds optimistic about oil prices flowing into on-market products, fueling the chase for gains and pushing premiums higher.

Gao Xiaomin, a researcher at Geshang Fund, analyzed that the high premiums of oil and gas funds are driven by two factors: one, the sharp volatility of international oil prices, which has led to suspensions of crude oil LOF subscriptions to protect fund stability and investors’ interests; two, the escalation of Middle East conflicts has led to market expectations of rising oil prices, prompting investors to rush into on-market trading, further distorting supply and demand and pushing premiums higher. Due to geopolitical shocks and QDII quota restrictions, the premiums of crude oil LOFs may remain elevated in the short term. As geopolitical risks ease, premiums are expected to gradually converge.

Hidden Concerns Behind High Premiums

Regarding the future, 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 developments. Investors should remain rational, avoid chasing highs, and implement proper risk controls.”

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

The essence of high premiums is a serious deviation between price and value. Simply put, a premium means investors are paying much more in the secondary market than the fund’s actual net asset value. For example, on March 24, the premium rate of E Fund’s crude oil LOF once reached 57.73%, China Asset Management’s was 55.90%, and Southern Oil LOF was 49.32%. This implies investors bought fund shares worth about 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, 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 Xiaomin 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. Investors are advised to avoid chasing high premiums 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 premiums falling back. 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 decline before evaluating entry timing. Given the volatility of commodities, a phased approach with stop-profit strategies is recommended to avoid heavy losses from a single large position.

Bosera Fund manager Wang Xiang also noted that the trajectory of macro geopolitical events is unpredictable, and reversals are common. Under high volatility in the oil and gas sector, rapid shifts between high-level re-pricing and retracement can occur. “Investors should maintain a strategic allocation approach and avoid overtrading based on short-term emotions.”