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Tough Time for Energy ETFs on Oversupply Concerns?

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Oil prices declined more than 2% on Jul 14 after major global oil producers clinched a deal on supply. The deal intends to supply more crude to a tight oil market and lower soaring prices. Brent oil prices declined on the news by as much as $1 per barrel towards $75 per barrel after Reuters reported Saudi Arabia and the United Arab Emirates had agreed a deal, per a Reuters article.

While Saudi Arabia and the UAE both recognized the need for boosting output immediately, the UAE was initially was against the idea of extending the current deal until December 2022 from April 2022 unless it was allowed a higher output quota. The UAE initially asked for its baseline to be raised from 3.2 million barrels a day to 3.8 million barrels a day.

According to sources cited by the Wall Street Journal, the deal reached between Saudi Arabia and the UAE will raise the UAE’s baseline to 3.65 million barrels per day from April 2022. The reports have not been officially confirmed, as quoted on CNBC.

The U.S. government data also showed gasoline demand declining considerably last week. While the U.S. Energy Information Administration said crude stockpiles fell more than expected, in their eighth successive drawdown, it was outdone by falling gasoline demand (read: Optimistic About Oil ETFs? 2 Factors May Hurt the Energy Market).

Also, there is likely supply glut of crude from Iran, said Bill Farren-Price, director at Enverus, as quoted on Reuters. If this was not enough, a deal between Iran and Western powers may result in higher oil exports, and supply coming from the United States.

Apart from oversupply worries, concerns of falling demand are also doing rounds. Multiple states in the United States have lifted Covid restrictions, giving a sense of normalcy. However, almost half of the United States reported rising cases recently, thanks largely to the delta variant.

“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.

France, the Netherlands and Spain announced new restrictions in order to curb rising cases of the highly contagious delta variant. In a research note on Monday, Oxford Economics said that despite a relatively low global Covid-19 count, the number of economies reporting the delta variant had jumped to 89, as quoted on CNBC (read: 5 ETFs to Win On Delta Variant's Surge).

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.

Invesco DB Oil Fund (DBO - Free Report) – Up 52.4% YTD

iPath Pure Beta Crude Oil ETN (OIL - Free Report) – Up 51.5% YTD

United States Oil Fund LP (USO - Free Report) – Up 50.6% YTD

ProShares K-1 Free Crude Oil Strategy ETF (OILK - Free Report) – Up 49.9%

United States 12 Month Oil Fund LP (USL - Free Report) – Up 48.5%

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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