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Optimistic About Oil ETFs? 2 Factors May Hurt the Energy Market

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Oil prices have staged a rally lately with United States Oil Fund LP (USO - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) adding about 7.8% and 7.5%, respectively, past month. This is in comparison with 2.9% gains in the S&P 500 Index.

Oil is up more than 50% this year. A host of factors aided the rally. Widening vaccine distribution and hefty stimulus under the Biden presidency along with a dovish Fed boosted hopes of a sooner-than-expected return to normalcy.

The latest boon came in the form of the failure of an OPEC+ deal. OPEC and its allies could not crack an important deal on their oil output policy last week, due rising tensions between Saudi Arabia and the UAE. OPEC+ also abandoned its meeting without a deal, leading the oil market to face tight supplies and rising prices.

OPEC+ is normally led by Saudi Arabia, a supporter of the UAE. But UAE’s objection to the terms, points to a rare disagreement between the duo.  Oil is now hovering around $75/barrel. Oil prices could “very easily” touch $100 a barrel in the aftermath of the failed OPEC+ talks, per former U.S. Energy Secretary Dan Brouillette, as quoted on CNBC.

Wall Street banks see oil prices surging ‘well above’ $80 this year, as quoted on CNBC. Brent prices could stay close to where they are now — in the $70 to $75 range — at least for the summer months, according to energy analyst Vandana Hari, as quoted on CNBC. However, there are some uncertainties that could disrupt the rally. Let’s delve a little deeper

What If OPEC+ Boosts Output in the Absence of a Deal?

“If there isn’t any agreement on production, and countries tend to go off and do their own thing, or do their own production, you could have a collapse of oil prices,” said former U.S. Energy Secretary Dan Brouillette, as quoted on CNBC.

Delta Variant: A Concern in the United States

Multiple states in the United States have lifted Covid restrictions, which boosted the sense of normalcy. However, almost half of United States reported rising cases last week, thanks largely to delta variant surge. Alaska and Arkansas more than doubled cases in just the last week. Cases in South Carolina and Kansas are up more than 50%.

“There’s a lot of uncertainty still in the air with regard to the virus, the variants and how … countries manage,” said Vandana Hari, as quoted on CNBC. With the virus mutating so fast in different variants, it’s tough to attain herd immunity in the near term.

ETFs in Focus

Against this backdrop, investors can play the oil ETFs as long as the trend is their friend. Below we highlight a few ETFs that could be watched closely in the near term. These ETFs/ETNs would rise if oil prices continue to gain.

Invesco DB Oil Fund (DBO - Free Report) – Up 55.8% YTD

iPath Pure Beta Crude Oil ETN (OIL - Free Report) – Up 55.5% YTD

United States Oil Fund LP (USO - Free Report) – Up 54.3% YTD

ProShares K-1 Free Crude Oil Strategy ETF (OILK - Free Report) – Up 53.6%

United States 12 Month Oil Fund LP (USL - Free Report) – Up 51.8%

Investors should also note that there is an inverse leveraged oil ETF called ProShares UltraShort Bloomberg Crude Oil (SCO - Free Report) , which would be gainful if there is any sudden crash in the oil patch.

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