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What Lies Ahead for Oil ETFs?

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Oil prices registered their largest weekly decline since 2016 as weekly U.S. shale production witnessed a sharp increase. Moreover, the S&P 500 entered correction territory, adding further pressure to oil prices as investors became more risk averse.

OPEC’s earlier fears came true. Amid the rally in crude prices in 2017, OPEC feared that it might lead to an unsustainable increase in shale output in the United States. The recent rise in U.S. output has brought the United States almost in line with Saudi Arabia and on track to surpass Russia’s daily output of 10.95 million barrels/day, per a Bloomberg article.

What’s Impacting Prices?

Plans of OPEC member nations and Russia to extend production cuts to the end of 2018 helped lift prices earlier in 2017. Moreover, oil prices have also been supported by fears of possible supply disruptions, owing to rising political unrest in OPEC member nations Iran and Venezuela.

Oil prices declined lower last week, as weekly crude oil production in the United States increased by 332,000 barrels/day to reach 10.25 million barrels/day, exceeding Saudi Arabia’s output for the first time since 1990. Energy companies in the United States added 26 oil rigs looking for new production last week, increasing the count to 791, the highest since April 2015.

Moreover, the S&P 500 entered correction territory, as it declined more than 10% from the record high set in January. This spooked investors and weighed on their risk appetite, which in turn made investors reallocate their portfolios and reduce their leveraged bets on risky asset classes like commodities. The recent sell-off in the markets, combined with increased U.S. output, weighed on oil prices, as speculators rushed to safeguard their portfolios from significant losses (read: Market in Correction: These ETFs & Stocks Still Offer Value).

What Lies Ahead?

Oil prices rallied in 2017, as global demand for the commodity surged and OPEC extended production cut plans. Going by the basics of economics, prices rally when demand exceeds supply. However, the recent increase in U.S. production coupled with lower demand on expensive crude might weigh on prices.  

Moreover, output is expected to rise further. Adding to the agony, the Fed is expected to hike rates at a faster pace than expected earlier. This might lead to a rally in the greenback and weigh on oil prices.   

However, on the bright side, little steadiness in the markets helped oil pare some of its earlier losses. Moreover, OPEC is not expected to sit tight and further actions by the organization with regard to the fate of oil prices might bring some relief to oil investors.

Let us now discuss a few ETFs focused on providing exposure to the space (see all Energy ETFs here).

United States Oil Fund (USO - Free Report)

This fund focuses on providing exposure to WTI crude by investing in listed crude futures and other oil-related futures contracts, and it may also invest in forwards and swaps.

It has AUM of $1.8 billion and charges a fee of 77 basis points a year. The fund has returned 4.5% in a year has but lost 1.3% so far this year.

iPath S&P GSCI Crude Oil Index ETN

This fund seeks to provide futures-based exposure to WTI crude.

It has AUM of $611.8 million and charges a fee of 75 basis points a year. The fund has returned 5.4% in a year but has lost 1.7% so far this year.

PowerShares DB Oil Fund (DBO - Free Report)

This fund focuses on providing futures-based exposure to WTI crude.

It has AUM of $304.9 million and charges a fee of 75 basis points a year. The fund has returned 7.8% in a year but has lost 0.8% so far this year.

United States Brent Oil Fund (BNO - Free Report)

This fund focuses on providing exposure to Brent crude.

It has AUM of $90.2 million and charges a fee of 90 basis points a year. The fund has returned 12.7% in a year but has lost 5.1% so far this year.

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