The most talked about commodity oil has been on investors’ radar, especially after the Organization of the Petroleum Exporting Countries (OPEC) agreed to cap its oil production for the first time in eight years on September 28. Though the deal will be finalized in the next meeting on November 30, it has triggered a rally, leading to an air of optimism in the energy sector (read: OPEC Surprises With Production Cut: Energy ETFs Soar).
In fact, Brent crude touched a one-year high of $53.73 per barrel on Monday, following Russian president Vladimir Putin’s support to limit production. He commented that the country is also ready to join the OPEC to curtail its output. Meanwhile, U.S. oil rose to $51.60 per barrel. With this, oil price has climbed about 13% since September 28.
The rally fizzled out in Tuesday’s trading session on the International Energy Agency (IEA) monthly report, which showed that the OPEC pumped a record 33.64 million barrels a day in September, up 160,000 barrels a day from August. On the other hand, global oil supply rose by 0.6 million barrels per day to 97.2 million barrels per day last month.
Libya, Iran and Nigeria that are not part of the agreement bolstered their production by a combined 120,000 barrels a day over August levels. They aim to boost daily production by at least another 580,000 barrels. The increase in output from these countries suggests bigger cuts by other OPEC members, notably Saudi Arabia, in order to rebalance the oil market. This is because the 14-member cartel proposed to cut oil output to 32.5–33 million barrels per day. To achieve the high end of the target, they need to cut at least 600,000 barrels a day.
As per the IEA, the oil market will rebalance earlier than expected should OPEC deal is finalized. However, many analysts remained skeptical about the deal and its ability to reduce big global supply glut thereby lowering their oil price forecast. Analyst at Capital Economics expects Brent and U.S. oil prices to be around $45 at the end of this year.
Further, the IEA lowered its global demand outlook to 1.2 million barrels per day this year from the previous forecast of 1.3 million barrels per day in September and 1.4 million barrels per day in August. The lower forecast was the result of vanishing OECD growth and a marked deceleration in China. Nevertheless, the agency believes demand could rebound in the fourth quarter due to cold weather that will boost demand for heating.
To sum up, the OPEC deal will be a huge boon for the energy sector as it will end the two-year crude-oil rout and stabilize the oil market. It will revitalize growth in the battered energy sector and lift the economies of the oil-rich countries like Russia and Saudi Arabia. On the other hand, any news on oil production increase, rise in inventory or waning demand could cause a drop in oil price (read: 3 Country ETFs Soaring on Hopes of Oil Output Curb).
Given the volatile environment for oil investment, investors should place their bet on oil ETFs cautiously or could take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.
Let’s take a look…
These Oil ETFs might be easier plays for investors seeking to deal directly in the futures market.
United States Oil Fund (USO): This is the most popular and liquid ETF in the oil space with an AUM of $3.6 billion and average daily volume of more than 31 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). The ETF has 0.45% in expense ratio and has gained 14% over the past 10 trading days.
United States Brent Oil Fund (BNO): This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $124.3 million in its asset base and trades in a good volume of roughly 176,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO surged 13% in the same time frame.
iPath S&P GSCI Crude Oil Index ETN (OIL): This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $851 million in AUM and trades in a solid volume of roughly 2.8 million shares a day. Its expense ratio came in at 0.75% and the note added 15.3% over the past 10 trading sessions (read: Top ETF Stories of September).
PowerShares DB Oil Fund (DBO): This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of more than 435,000 shares and AUM of $475.8 million. It charges an expense ratio of 78 bps and has gained 12.6% in the same time frame.
Investors who are bullish on oil right now may consider a near-term long on the commodity with the following leveraged oil ETFs depending on their risk appetite.
ProShares Ultra Bloomberg Crude Oil ETF (UCO): This fund seeks to deliver twice (2x or 200%) the return of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $1 billion in AUM and trades in solid volume of about 9.7 million shares a day on average. Its expense ratio is 0.95%. The ETF spiked 29% in the same time frame.
VelocityShares 3x Long Crude Oil ETN (UWTI): It seeks to deliver thrice (3x or 300%) the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed over $1.4 billion in its asset base. It trades in heavy volumes of 19.4 million shares a day, though it charges a higher fee of 1.35% per year. UWTI surged 46% over the past 10 trading sessions (read:Oil ETFs Soar on Positive News: Will the Rally Last?).
Any negative news flow could provide investors’ a near-term short opportunity using inverse oil ETFs on the commodity according to their risk appetite.
PowerShares DB Crude Oil Short ETN (SZO): This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil future contracts. The note is unpopular as evident from an AUM of $9.5 million and average daily volume of nearly 2,000 shares a day. Its expense ratio is 0.75%. The ETN lost 10.4% over the past 10 trading sessions.
ProShares UltraShort Bloomberg Crude Oil (SCO): This fund delivers twice the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $226.1 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 732,000 shares in hand per day. The ETF lost over 24% over the past 10 sessions (read: 5 ETFs for Those Who Believe the Oil Rally is Over).
PowerShares DB Crude Oil Double Short ETN (DTO): This is an ETN option providing twice inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $51.7 million in its asset base and trades in a light daily volume of about 20,000 shares. The product charges 75 bps in fees per year from investors and has lost 21.6% in the same time frame.
VelocityShares 3x Inverse Crude ETN (DWTI): This product provides three times inverse exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is solid at 3.7 million shares. It has amassed $474.7 million in its asset base and shed 34.8% in the same period.
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US-OIL FUND LP (USO): ETF Research Reports
PWRSH-DB OIL FD (DBO): ETF Research Reports
IPATH-GS CRUDE (OIL): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
PRO-ULS BB CRUD (SCO): ETF Research Reports
VEL-3X INV CRD (DWTI): ETF Research Reports
DB CO SH (SZO): ETF Research Reports
DB CO DS (DTO): ETF Research Reports
PRO-ULT BB CRUD (UCO): ETF Research Reports
VEL-3X LNG CRD (UWTI): ETF Research Reports
