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Oil prices have been volatile lately flipping between bear and bull markets. While higher OPEC production and a rise in the number of rigs operating in U.S. oil fields stoked supply glut concerns, a likely output control talk among major oil producers scheduled to take place in September 26-28 in Algeria gave this commodity some support (read: Top ETF Stories of August).
Also, Russia and OPEC bigwig Saudi Arabia’s decision to join hands on stabilizing the oil market, raised hopes further for oil ETFs. Overall, United States Oil Fund (USO - Free Report) , which looks to track the spot price of WTI crude, added 6.7% and United States Brent Oil (BNO - Free Report) , which tracks the daily price movements of Brent crude oil, was up 7.2% in the last one month (as of September 7, 2016). But both funds were down about 2% each in the last five days (as of September 7, 2016) (read: Oil ETFs Soar on Positive News: Will the Rally Last?).
Will Algeria See an Output Freeze Deal?
First, investors should not keep high hopes on any output freeze possibility. Previously, in April, such an attempt was made in Doha. But all hopes went down the drain as the OPEC top-brass Saudi disagreed to the deal citing Iran’s lack of participation (read: How to Profit from the Failed Doha Meeting via ETFs).
In fact, Iran has been boosting production since the international sanctions on it were lifted in January. This is because Iran was producing below its capacity and pre-sanctions levels since 2011 while the other countries raised their output limit to record levels in the meantime.
So Iran is in no mood to curtail its production levels and in fact it indicated lately that would keep pumping oil in the next few months till it reaches pre-sanctions levels, despite the recent Russia and Saudi pact.
What Does OPEC Actually Want?
Second, going by an article published in Wall Street Journal, Iran’s oil minister indicated that “he and others in OPEC are hoping to get the oil price between $50 and $60 a barrel—higher than today’s $47 or so, but low enough to keep “rivals from raising their output.”
The statement indicates OPEC’s intent to restrain the shale-oil boom in the U.S. As per Wall Street Journal, OPEC is worried about U.S. producers rushing into production if oil gets past $60 a barrel, to capitalize on high oil price.
So, even if any output freeze deal is reached in Algeria, that would not be enough to push prices up to as high as $70 or more. The deal will bind oil within the $50–$60 level, representing a 6.4% to 27.7% price appreciation from the current level.
As per an analyst, “the upcoming meeting isn’t going to do very much. If OPEC freezes at these levels, these are record levels." Thus, oil ETFs may witness a sentiment-driven rally on output control talks, but that rally is likely to be short-lived.
Any Ray of Hope?
Iran is approaching its pre-sanctions levels fast. Its present rate of production is slightly over 3.8 million barrels per day, not far away from its pre-sanction levels of over 4 million. Iran will likely reach that level in two–three months.
Iran also expects the oil market to rebalance by the fourth quarter of 2016 or the beginning of next year. In this scenario, Iran may not pose any hindrance this time around and OPEC may agree to an output control talk in Algeria.
What Should Be Your Take on Oil ETFs?
Apart from the imminent OPEC meet, oil inventory data released by EIA will also play an important role in setting the oil price movement. Lately, oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count – the ninth increase in 10 weeks (read: Oil in Bear Territory: Short Oil & Energy ETFs).
U.S. crude inventories are estimated to rise by about 200,000 barrels last week following two consecutive weeks of expansion, as per a Reuters’ poll. However, some analysts expect a fall in crude oil inventories due to evacuations from offshore facilities in the Gulf of Mexico following the latest Hermine storm. Even if this holds good, this is a one-time event, failing to give oil prices the sustained backing that it needs.
Overall, sentiments are not too positive. So, oil is expected to move sideways in the days to come. However, all these developments put oil ETFs like USO, BNO, iPath S&P GSCI Crude Oil Total Return Index ETN andPowerShares DB Oil Fund (DBO - Free Report) in focus.
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Should You Buy Oil ETFs Ahead of the OPEC Meet?
Oil prices have been volatile lately flipping between bear and bull markets. While higher OPEC production and a rise in the number of rigs operating in U.S. oil fields stoked supply glut concerns, a likely output control talk among major oil producers scheduled to take place in September 26-28 in Algeria gave this commodity some support (read: Top ETF Stories of August).
Also, Russia and OPEC bigwig Saudi Arabia’s decision to join hands on stabilizing the oil market, raised hopes further for oil ETFs. Overall, United States Oil Fund (USO - Free Report) , which looks to track the spot price of WTI crude, added 6.7% and United States Brent Oil (BNO - Free Report) , which tracks the daily price movements of Brent crude oil, was up 7.2% in the last one month (as of September 7, 2016). But both funds were down about 2% each in the last five days (as of September 7, 2016) (read: Oil ETFs Soar on Positive News: Will the Rally Last?).
Will Algeria See an Output Freeze Deal?
First, investors should not keep high hopes on any output freeze possibility. Previously, in April, such an attempt was made in Doha. But all hopes went down the drain as the OPEC top-brass Saudi disagreed to the deal citing Iran’s lack of participation (read: How to Profit from the Failed Doha Meeting via ETFs).
In fact, Iran has been boosting production since the international sanctions on it were lifted in January. This is because Iran was producing below its capacity and pre-sanctions levels since 2011 while the other countries raised their output limit to record levels in the meantime.
So Iran is in no mood to curtail its production levels and in fact it indicated lately that would keep pumping oil in the next few months till it reaches pre-sanctions levels, despite the recent Russia and Saudi pact.
What Does OPEC Actually Want?
Second, going by an article published in Wall Street Journal, Iran’s oil minister indicated that “he and others in OPEC are hoping to get the oil price between $50 and $60 a barrel—higher than today’s $47 or so, but low enough to keep “rivals from raising their output.”
The statement indicates OPEC’s intent to restrain the shale-oil boom in the U.S. As per Wall Street Journal, OPEC is worried about U.S. producers rushing into production if oil gets past $60 a barrel, to capitalize on high oil price.
So, even if any output freeze deal is reached in Algeria, that would not be enough to push prices up to as high as $70 or more. The deal will bind oil within the $50–$60 level, representing a 6.4% to 27.7% price appreciation from the current level.
As per an analyst, “the upcoming meeting isn’t going to do very much. If OPEC freezes at these levels, these are record levels." Thus, oil ETFs may witness a sentiment-driven rally on output control talks, but that rally is likely to be short-lived.
Any Ray of Hope?
Iran is approaching its pre-sanctions levels fast. Its present rate of production is slightly over 3.8 million barrels per day, not far away from its pre-sanction levels of over 4 million. Iran will likely reach that level in two–three months.
Iran also expects the oil market to rebalance by the fourth quarter of 2016 or the beginning of next year. In this scenario, Iran may not pose any hindrance this time around and OPEC may agree to an output control talk in Algeria.
What Should Be Your Take on Oil ETFs?
Apart from the imminent OPEC meet, oil inventory data released by EIA will also play an important role in setting the oil price movement. Lately, oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count – the ninth increase in 10 weeks (read: Oil in Bear Territory: Short Oil & Energy ETFs).
U.S. crude inventories are estimated to rise by about 200,000 barrels last week following two consecutive weeks of expansion, as per a Reuters’ poll. However, some analysts expect a fall in crude oil inventories due to evacuations from offshore facilities in the Gulf of Mexico following the latest Hermine storm. Even if this holds good, this is a one-time event, failing to give oil prices the sustained backing that it needs.
Overall, sentiments are not too positive. So, oil is expected to move sideways in the days to come. However, all these developments put oil ETFs like USO, BNO, iPath S&P GSCI Crude Oil Total Return Index ETN andPowerShares DB Oil Fund (DBO - Free Report) in focus.
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 >>