JPMorgan’s digital notes on WTI futures offer compelling yield, protection in volatile sector

By Emma Trincal

New York, Sept. 11 – JPMorgan Chase Financial Co. LLC’s $3.85 million of 0% digital contingent buffered notes due Sept. 20, 2024 linked to the performance of a WTI Crude Oil Futures Contract provide investors with a solid yield and decent downside protection for a speculative bet on a volatile commodity, advisers said.

If the commodity gains, finishes flat or falls by up to 33.55%, the payout at maturity will be par plus 14%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will be exposed to the commodity’s decline from its initial level.

Another deal

JPMorgan on the same day priced another note for $4.05 million with very identical characteristics, including the maturity date, underlying and payout structure. The difference was a slightly lower digital amount of 11.8% in exchange for a buffer. The 30% geared buffer protected investors from losses of up to 30% after which each 1% decline in commodity price led to a 1.42857% loss.

“The first one is pretty good if you’re seeking to get some high yield with a lot of protection,” said Scott Cramer, president of Cramer & Rauchegger.

“The buffered one may be better especially with oil, which can get very volatile. But that barrier is a lot.

“Both notes are good if you want some above-average yield in a defensive strategy.”

Not for bulls

Since the digital payout in each deal is a cap, the notes would not be suitable for bulls, he said.

“If you’re bullish, you invest in oil. It’s not fair to compare these notes with a direct commodity investment. That’s not why you’re buying them,” he said.

Bulls can invest in the stocks of oil companies through two commonly used ETFs – the SPDR S&P Oil & Gas Exploration & Production ETF or the Energy Select Sector SPDR ETF. For direct exposure to commodities futures, he cited the United States Oil Fund, LP.

Bullish case

Cramer himself is bullish on oil.

“The market operates on a supply/demand basis. Demand is hanging in there and supplies are tight,” he said.

Saudi Arabia is cutting 1 million barrels a day between now and the end of the year, and Russia has also announced some cuts, he noted.

“In the case of Russia, I’m not too sure the cuts are voluntary. Russia is losing production due to the sanctions, which make is harder for them to extract and transport oil. If they cut, it’s out of necessity, not willingly,” he said.

Another bullish driver is climate change, he noted.

“There is a worldwide war against oil production because of fossil fuels. It’s now more expensive and harder to bring oil to the market. It’s true not just in the U.S. but in all G7 countries,” he said.

A problem which could also push up WTI prices is the reduced output from shale capacity as many wells have a short-life and need to be replaced.

“And they have not,” he said.

Growth

Some bearish analysts stress headwinds in China as a potential source of weakened global demand for oil.

But Cramer was not convinced.

“People talk about the Chinese economy slowing down. Yes, Chinese GDP is slowing down. But their economy is still growing,” he said.

A recession in the U.S. would negatively impact oil prices but its consequences would depend on its severity.

“A recession like the one we had in the spring of 2020 was akin to an apocalypse. We locked up the whole world. Hopefully it won’t happen again. If it does, all bets are off,” he said.

Aggressive play

Carl Kunhardt, wealth advisor at Quest Capital Management, said he would be reluctant to buy the notes.

“I wouldn’t do it,” he said.

It’s not because I don’t like the terms of the notes or the underlier. WTI contracts are to oil what the S&P is to U.S. equity.”

Kunhardt’s lack of enthusiasm was not related to his outlook on the commodity. He said he expected a spike in oil prices due to the cuts from Saudi Arabia and Russia.

“The reason I wouldn’t touch it as a financial planner is because this market is manipulated. Betting on oil is speculative. You would have to put the notes in an aggressive portfolio. Oil prices don’t depend so much on market fundamentals. They depend on politics. So, I don’t think it’s good sector to be invested in,” he said.

This adviser said he preferred the product with the 30% buffer over the barrier notes.

“I would go for the buffer. If you’re down 35%, you only lose 7% as opposed to being completely long and taking a 35% loss,” he said.

Uncertainty

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, also pointed to the speculative nature of the underlying.

“There are a lot of macroeconomic factors that are likely to drive oil prices higher,” he said, adding that he is bullish over the next 10 years.

“Over the short-term though anything can happen. It’s a very speculative commodity whose price moves have nothing to do with supply and demand but everything to do with politics. It’s a political commodity.

“I don’t really know what the price of oil will be over the next 12 months. I’m sure it will be higher but I’m not sure how much higher,” he said.

He felt comfortable with the terms of the barrier note.

“The 14% return looks like a good number, especially at that barrier level,” he said.

The notes priced when the WTI contract closed at $85.55, setting the barrier price at $56.85.

“I don’t think oil will jump more than 14%. On the other hand, we could go below that barrier especially if we have a recession. But we’ve been talking about a recession for a while now. Who’s to say it will happen,” he said.

From a risk-reward standpoint, Chisholm also preferred the buffered version of the trade.

“I always like buffers better than barriers. Here it’s only a 2% difference in return between the two. The additional protection you get from the buffer is worth giving up those 2%,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The barrier notes (Cusip: 48133WN53) settled on Sept. 7.

The buffered notes (Cusip: 48133WP69) settled on Sept. 7.

The fee for each deal is 1%.

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