United States Brent Oil Fund, LP (BNO)

Contango—when far-dated futures cost more than near-dated ones—is the ETF’s permanent headwind, a tax on buy-and-hold investors that funds running oil futures never fully escape.

The United States Brent Oil Fund is a limited partnership that trades on the New York Stock Exchange under the ticker BNO. It holds rolling contracts on Brent crude oil, the global oil benchmark, and its price moves in tandem with the price of oil itself minus the drag from trading costs and the structure of the futures market. For an investor who wants oil exposure without buying futures directly or owning physical barrels, BNO offers a simple vehicle: hold it in a brokerage account, watch the price of Brent crude, and expect the fund to track that price downward slightly each year due to the mechanical cost of rolling futures contracts. The fund competes with its American counterpart, the United States Oil Fund (USO), which tracks West Texas Intermediate crude, and with dozens of other energy and commodity vehicles that aim to give investors a simple way to bet on petroleum.

How Brent oil became the global standard

Brent crude is mined from the North Sea oilfields between the United Kingdom and Norway, and it has become the most widely used pricing benchmark for crude oil worldwide. The price of Brent is set daily on the London Intercontinental Exchange (ICE) and reflects the cost to buy a barrel of that specific type of crude delivered to Cushing, Oklahoma or other agreed-upon locations. Brent is lighter and sweeter—less dense and lower in sulfur—than West Texas Intermediate, and most of the world’s oil production is lighter and sweeter as well, which is why Brent, rather than the American-focused WTI standard, has become the reference price that OPEC and other producers use.

BNO’s job is to track that price. It does so by holding a rolling position in Brent futures contracts listed on the ICE and, as each contract nears expiration, selling it and rolling into the next contract month—buying June oil in May, buying July oil in June, and so on. This rolling mechanism is simple in concept but costly in practice, which is why the fund’s performance lags the actual price of Brent by a small percentage each year.

The contango trap

The fund’s single biggest structural headwind is called contango. When oil markets are calm and storage is not constrained, far-dated oil futures (contracts for delivery months far in the future) typically cost more than near-dated ones (contracts expiring in a few weeks). This makes intuitive sense: you pay to store oil, to insure it, and to carry it forward in time, so a barrel delivered in six months costs more than a barrel delivered next month. When the fund rolls its contracts by selling June oil and buying July oil at a higher price, it is paying that contango premium. Over a full year of rolling, if contango is steep and persistent, the drag can easily amount to several percent of the fund’s value.

Contango is temporary only during supply shocks or geopolitical crises, when nearby oil is scarce and far-dated oil is abundant—a situation called backwardation, in which near-dated contracts cost more than far-dated ones. During a backwardation regime, the rolling fund actually benefits, making money on each roll. But those periods are rare and unpredictable. For a buy-and-hold investor, contango is a permanent drag.

This is why many financial advisers recommend against long-term holdings of commodity futures ETFs like BNO. If you believe oil will be $100 a barrel in three years, and you buy BNO today expecting to hold until then, you will underperform the price appreciation because of the contango tax along the way. This is a peculiar feature of how commodity markets work and a reason why some investors prefer owning energy stocks (which do not face contango) or buying oil directly if they have the means.

Brent versus West Texas Intermediate

BNO’s closest structural peer is the United States Oil Fund (USO), which tracks West Texas Intermediate crude instead. WTI is the American pricing benchmark, derived from oil produced in the Permian Basin and other U.S. sources, and it has historically been slightly cheaper than Brent because it is a heavier and more sulfurous crude. OPEC did not adopt WTI as its pricing standard, so WTI has gradually become less relevant to global markets than Brent. BNO, tracking the global standard, is typically more widely used and more liquid.

That said, both funds face the same contango drag and the same fundamental limitations: they are bets on the price of the commodity itself, not on the energy business or the companies that extract, refine, and distribute oil. They do not capture the margin or the efficiency gains of an integrated oil company like Chevron or Shell. They do not benefit from technological advancement or from an improvement in a company’s operations. They simply track an commodity price minus costs.

Who uses BNO, and why

Investors hold BNO for three main reasons. First, as a tactical trade: someone expects the price of oil to spike over the next few months (perhaps due to geopolitical tension or a production outage), and they buy BNO expecting to sell it for a quick profit. In that case, the contango drag matters less because the position is short-term. Second, as a hedge: a commercial airline or a petrochemical manufacturer that consumes oil wants to hedge the risk of prices rising, and BNO is a simple way to create an offsetting long position. Third, as a diversifier in an investment portfolio: oil prices sometimes move inversely to stocks and bonds, so some investors hold a small allocation to oil for portfolio diversification, and BNO is an accessible vehicle for that. None of these uses involve a long-term buy-and-hold assumption that the fund will beat holding the commodity itself.

The energy transition and structural pressure

The longer-term pressure on BNO is the same pressure facing all fossil-fuel investments: the world’s energy supply is gradually shifting toward renewables, electric vehicles are displacing combustion engines, and demand growth for oil is likely to be modest for the next several decades. A patient investor betting on mean reversion to high prices might buy the fund during a moment when oil is very cheap, expecting a recovery. But the structural trend toward reduced oil use is a headwind that neither BNO nor any oil fund can ignore.

For investors tracking the price of oil as a market, or seeking a simple way to hedge energy costs, BNO is liquid and straightforward. For long-term holders, it is a sub-optimal vehicle because of contango. For speculators on near-term oil moves, it is a useful tool. The key to using BNO correctly is understanding that it is a short-term tactical vehicle, not a long-term hold, and that the fund’s value will slowly erode relative to the spot price of Brent crude simply because of the cost of rolling futures contracts month to month.