Back to top

Image: Bigstock

Oil ETFs Soar on Positive News: Will the Rally Last?

Read MoreHide Full Article

Oil prices sprung up on August 11 as the OPEC bid-wig Saudi’s oil minister indicated taking “any possible action” to steady prices. Along with Saudi, the International Energy Agency (IEA) helped oil to resume a recently-lost rally by predicting that “crude markets would tighten in the second half of 2016.”

Prior to this, oil entered a bear territory early this month at the $40 level on supply glut concerns. Higher OPEC production and a rise in the number of rigs operating in U.S. oil fields for five successive weeks caused this massacre. Also, with output in Canada resuming after the wildfire issues, raw crude inventory in the U.S. saw a surge.

Oil started 2016 on an extremely low note, plunging to as low as a below-$30 level in February but finally sprung to $50 in June, on easing abundance (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners). However, on August 11, U.S. crude oil breached the $43.70 level, spreading cheer in the stock market.

Inside The Bull Story

United States Oil (USO - Free Report) – which looks to track the daily changes of the spot price of U.S. crude – added about 4.5% on August 11 and advanced about 0.8% after hours. On the other hand, United States Brent Oil (BNO - Free Report) – which looks to track the daily changes in percentage terms of the spot price of Brent crude oil – tacked on about 4.8% gains on that day (read: These Country ETFs Benefit from Oil Rebound).

The steep increase came as Saudi oil minister’s comments once again infused hopes of an output freeze talks ina meeting among OPEC members and nonmembers, scheduled on September 26–28 in Algeria. This comment instigated fund buying and some short covering, lending strong price support to oil, as per Reuters.

Plus, IEA indicated that though oil price decline once again flared up fears of the glut lately manifested by the usage of more oil rigs by domestic oil drillers, the market has not yet not faced any oversupply concern in 2H of 2016.

The Reuters report also indicated that brokerage firm Bernstein expects, “high inventories, especially of refined fuel, to spur further refinery run cuts in the next few months.”

Even there are analysts who are eyeing a revival next year. As per the median of at least 20 analyst estimates compiled by Bloomberg a few days ago, global oil prices will likely average $57 a barrel in 2017.

Threats Remain…

There are downside risks to the recent optimism in the oil patch too. As per a Wall Street Journal report, the IEA lowered its forecast for global demand growth by 100,000 barrels a day to 1.2 million barrels for next year, thanks mainly to the knock-on effects of Brexit on the global economy.

Plus, the U.S. Energy Department's weekly inventory release showed that crude stockpiles recorded a surprise increase in the week ended August 5.Crude inventories increased by 1.06 million to 523.6 million barrels. With this, current crude supplies are up 15% from the year-ago period. There was also record July production from Saudi Arabia.

Things are also not going too well in the U.S., China and the Euro zone manufacturing sectors raising questions over the demand picture. Meanwhile, Q2 GDP data for the U.S. economy came in weaker than expected and growth worries in other developed nations remain.

Investors should also note that speculation over production cut pushed up oil in April in vain after Iran excused itself from the meeting of the 18 oil-producing nations (read: How to Profit from the Failed Doha Meeting via ETFs).

ETFs in Focus

So, it is advisable for investors to tread cautiously while playing oil. As of now, investors can play the jump with products like iPath S&P GSCI Crude Oil Index ETN which added about 4.8% and about 1.3% after hours. Also, PowerShares DB Oil Fund (DBO - Free Report) advanced over 3.7% on August 11 and added over 6.2% after hours. United States 12 Month Oil (USL - Free Report) rose about 3.7% on August 11.

But if things turn negative for inverse ETFs likeUnited States Short Oil Fund , funds like ProShares UltraShort Bloomberg Crude Oil ETF (SCO - Free Report) and ProShares Short Oil & Gas ETF  will come into investors’ rescue (read: Oil in Bear Territory: Short Oil & Energy ETFs).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Published in