Russia’s recent takeover of Crimea, which was a Ukrainian territory, triggered many global issues. Some experts assume that Russia’s motive was to win not only Crimea, but also some other territories of southern and eastern Ukraine which have pockets of Russians in them. All these issues aroused anguish in the West, which cited Russian activity as an utter violation of international law and sovereignty.
A sort of cold war has been making rounds since then, with the U.S. and the European Union imposing restrictions on Russia seemingly every day. Primarily, the sanctions were strictly against individuals, but the Western world made it very clear that it will not think twice before implementing stricter financial/trade sanctions against Russia if the situation keeps deteriorating.
Commodities in Focus on the Tensions
While the latest geopolitical tension has been disruptive to global stock markets, the turmoil emerged as a boon for a host of commodity investments with oil being one of largest beneficiaries. This is because Russia is one of the top producers of crude oil in the world.
With an improving developed world economy, the demand for oil will be understandably high. Most importantly, Western Europe is highly dependent on Russian production to energize its nations as it imports about 40% of its energy requirement.
However, this European dependence on Russia does not seem to hold back the former from imposing sanctions against the latter. Last Friday, the Russian deputy prime minister, two aides to President Vladimir Putin, and nine others, were slapped with restrictions by the European Union. This was in addition to the many more high officials already banned by the U.S. and Europe (read: Russia ETFs: Immune to Emerging Market Weakness?).
This decision sent oil prices into rally mode with both Brent and U.S. crude oil for May delivery rising decently in Friday’s session. Also, soon after the announcement of the sanctions – planned to put Russia in a difficult spot for its seizure of Crimea – Gunvor, a global commodity trading company, announced that Russian billionaire oil trader Timchenko has sold his stake in Gunvor. The U.S. government doubted that Putin has "investments" in Gunvor which is why this stake sell took place, but Gunvor ruled out the allegation.
In short, the overall global supply concern brings oil investing back into the spotlight. In the absence of Russian supply, Western Europe might turn to alternate markets to meet its energy requirement. This should potentially boost the oil production back home and energy exports to friendly European nations in the medium term.
Investors should note that European leaders are diligently planning to broaden their horizons of energy supplies, considering more wind and solar power options, shale-gas exploration and imports of liquefied natural gas from the United States and the Middle East. Britain passed a paper to EU member states proposing that Iraq could be a possible solution for long-term source of oil and gas supplies (read: 3 Energy ETFs to Buy on the Ukraine Crisis).
How to Play?
Given this situation, investors may want to consider a closer look at oil investments. While investing in oil futures is certainly an option, investors can also tap into this trend by purchasing ETFs that have exposure to oil futures. The following ETFs should thus be closely watched if sanctions thumped by the Western world threaten the flow of Russia’s oil supplies in the near term:
United States Oil Fund (USO)
This is the most popular and liquid ETF in the oil space with AUM of over $1.39 billion and average daily volume of over four million shares. The fund seeks to match the performance of the spot price of light sweet crude oil West Texas Intermediate (read: Oil ETFs Warm Up as U.S. Chills Again).
As the fund provides exposure to front-month oil futures, the product needs to roll from one futures contract to the next, producing a roll yield situation. If the front-month contract is higher than the next-month contract (also called backwardation), the roll yield is positive, though if the opposite situation is true it produces a situation called contango which is a negative for investors. The ETF has a 0.45% expense ratio, and it has gained nearly 2.21% over the last ten trading sessions (as of March 26, 2014).
PowerShares DB Oil Fund (DBO)
This ETF also gives investors exposure to crude oil, and it also sees solid assets under management at about $303 million. The product tracks the movements of West Texas Intermediate (WTI) light, sweet crude oil. It charges an expense ratio of 79 bps. DBO gained 1.77% in the last five days.
iPath S&P GSCI Crude Oil Index ETN (OIL)
This is an ETN option for oil investors, tracking a spot price benchmark of WTI crude. So far, it has garnered $219 million in assets. The product charges 75 bps in fees. This ETN is up roughly up 2.38% in the last ten key trading sessions (see ETFs vs. ETNs: What’s The Difference?).
Oil investing is sitting on the fence now with perils and possibilities remaining at two sides. On the negative side there is preliminary gauge of manufacturing activity in China which contracted for three months in a row and might result in reduced demand for oil.
Also, Iraq’s exports increased, settling some infrastructural bottlenecks and OPEC crude supplies remained in a good position, as per EIA. However, the intensification of diplomatic pressure on Russia is a positive at the current level, and this driver seems to be the heavy weight for oil ETFs in the near term.
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