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Is it a Good Idea to Invest in Oil ETFs? Let's Find Out
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The pandemic-hit 2020 has witnessed an extremely volatile oil market. It has struggled with various headwinds like Middle-East tensions to coronavirus-led demand slowdown along with slipping into the negative territory for the first time ever in April. However, the West Texas intermediate (WTI) crude has shown recovery signs on enhanced oil market prospects marked by improved supply and demand management along with some rebound in global economies. Notably, after closing at a nine-month high on Dec 4, futures in New York traded near $46 a barrel, per a Bloomberg article.
Let’s look at the factors that are pointing toward an improving and more conducive environment for oil markets going forward:
OPEC+ Decides to Expand Production
OPEC+ members (including OPEC and non-OPEC allies) have decided to ramp up production by 500,000 barrels per day (Bbl/D) in January, narrowing the total production cut from the current 7.7 million Bbl/D to 7.2 million Bbl/D. Riding the tide, Saudi Arabia has increased Asia’s oil pricing (per a Bloomberg article).
In this regard, Vandana Hari, founder of Vanda Insights in Singapore, has said that “while OPEC+ averted the possibilities of a 1.9 million barrels a day boost or even another collapse of the alliance, a 500,000 barrels a day increase is hardly a decision to spur the bulls,” as mentioned in a Bloomberg article.
The world’s second-largest economy seems to be recovering well from the pandemic-driven economic slowdown, which is adding to expectations of sustained global demand for oil. With support from the strong global demand for coronavirus outbreak-related goods, the country’s export levels increased at the fastest pace since February 2018 in November. Moreover, amid the globally worsening health crisis, China’s trade surplus jumped to a monthly record high level.
Adding to the optimism in the investing world, a group of bipartisan senators announced a $908-billion "framework" for coronavirus relief aid on Dec 1, per a CNBC article. The introduction of another round of fiscal stimulus is expected to provide great support to U.S. equities and boost demand.
Progress in Coronavirus Vaccine Boosts Prospects
Going on, OPEC+ member’s latest agreement to gradually raise production indicates oil producers’ expectation of sustained global recovery for fuel demand as encouraging progress is witnessed in coronavirus vaccine development.
Pfizer Inc. (PFE) and BioNTech SE (BNTX) have again posted encouraging updates regarding their coronavirus vaccine candidate, BNT162b2. The duo’s two-shot vaccine has been authorized by U.K. medicines regulator, the Medicines and Healthcare products Regulatory Agency (MHRA).
Moreover, the two front-runners in the coronavirus vaccine race, Moderna (MRNA) and Pfizer/BioNTech, have applied to the FDA for emergency use authorization for their coronavirus vaccine. Notably, the FDA is supposed to meet with its Vaccines and Related Biological Products Advisory Committee on Dec 10 to review Pfizer's application and on Dec 17 to evaluate Moderna's application, going by a CNN report.
It is important to note here that distribution of coronavirus vaccines could start within weeks, pending authorization from the FDA, per the US Health and Human Services Secretary Alex Azar (according to a CNN report). However, it shall be June 2021 by when all Americans (who want a vaccine) will get vaccinated, according to an official with the White House vaccine initiative, per the report mentioned above.
Oil ETFs That Might Gain
Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).
The United States Oil Fund’s investment objective is for the daily changes, in percentage terms, of its shares’ net asset value (NAV) to reflect the daily changes, in percentage terms, of the spot price of light sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in the Benchmark Oil Futures Contract (read: 4 Inverse leveraged ETFs of Last Week).
The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: Tropical Storms Put These Oil ETFs in Focus).
Image: Bigstock
Is it a Good Idea to Invest in Oil ETFs? Let's Find Out
The pandemic-hit 2020 has witnessed an extremely volatile oil market. It has struggled with various headwinds like Middle-East tensions to coronavirus-led demand slowdown along with slipping into the negative territory for the first time ever in April. However, the West Texas intermediate (WTI) crude has shown recovery signs on enhanced oil market prospects marked by improved supply and demand management along with some rebound in global economies. Notably, after closing at a nine-month high on Dec 4, futures in New York traded near $46 a barrel, per a Bloomberg article.
Let’s look at the factors that are pointing toward an improving and more conducive environment for oil markets going forward:
OPEC+ Decides to Expand Production
OPEC+ members (including OPEC and non-OPEC allies) have decided to ramp up production by 500,000 barrels per day (Bbl/D) in January, narrowing the total production cut from the current 7.7 million Bbl/D to 7.2 million Bbl/D. Riding the tide, Saudi Arabia has increased Asia’s oil pricing (per a Bloomberg article).
In this regard, Vandana Hari, founder of Vanda Insights in Singapore, has said that “while OPEC+ averted the possibilities of a 1.9 million barrels a day boost or even another collapse of the alliance, a 500,000 barrels a day increase is hardly a decision to spur the bulls,” as mentioned in a Bloomberg article.
The world’s second-largest economy seems to be recovering well from the pandemic-driven economic slowdown, which is adding to expectations of sustained global demand for oil. With support from the strong global demand for coronavirus outbreak-related goods, the country’s export levels increased at the fastest pace since February 2018 in November. Moreover, amid the globally worsening health crisis, China’s trade surplus jumped to a monthly record high level.
Adding to the optimism in the investing world, a group of bipartisan senators announced a $908-billion "framework" for coronavirus relief aid on Dec 1, per a CNBC article. The introduction of another round of fiscal stimulus is expected to provide great support to U.S. equities and boost demand.
Progress in Coronavirus Vaccine Boosts Prospects
Going on, OPEC+ member’s latest agreement to gradually raise production indicates oil producers’ expectation of sustained global recovery for fuel demand as encouraging progress is witnessed in coronavirus vaccine development.
Pfizer Inc. (PFE) and BioNTech SE (BNTX) have again posted encouraging updates regarding their coronavirus vaccine candidate, BNT162b2. The duo’s two-shot vaccine has been authorized by U.K. medicines regulator, the Medicines and Healthcare products Regulatory Agency (MHRA).
Moreover, the two front-runners in the coronavirus vaccine race, Moderna (MRNA) and Pfizer/BioNTech, have applied to the FDA for emergency use authorization for their coronavirus vaccine. Notably, the FDA is supposed to meet with its Vaccines and Related Biological Products Advisory Committee on Dec 10 to review Pfizer's application and on Dec 17 to evaluate Moderna's application, going by a CNN report.
It is important to note here that distribution of coronavirus vaccines could start within weeks, pending authorization from the FDA, per the US Health and Human Services Secretary Alex Azar (according to a CNN report). However, it shall be June 2021 by when all Americans (who want a vaccine) will get vaccinated, according to an official with the White House vaccine initiative, per the report mentioned above.
Oil ETFs That Might Gain
Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).
United States Oil Fund (USO - Free Report)
The United States Oil Fund’s investment objective is for the daily changes, in percentage terms, of its shares’ net asset value (NAV) to reflect the daily changes, in percentage terms, of the spot price of light sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in the Benchmark Oil Futures Contract (read: 4 Inverse leveraged ETFs of Last Week).
AUM: $3.63 billion
Expense Ratio: 0.73%
Invesco DB Oil Fund (DBO - Free Report)
The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: Tropical Storms Put These Oil ETFs in Focus).
AUM: $421.8 million
Expense Ratio: 0.78%
United States Brent Oil Fund (BNO - Free Report)
The fund tracks the daily price movement of Brent crude oil.
AUM: $341.3 million
Expense Ratio: 0.90%
United States 12 Month Oil Fund (USL - Free Report)
The fund replicates with possible accuracy the price movements of West Texas Intermediate light, sweet crude oil.
AUM: $202.6 million
Expense Ratio: 0.82%
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