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Oil ETFs Take a Hit on Sudden Inventory Build

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Oil prices have been erasing the gains from last week, as weekly U.S. shale production witnessed a sharp increase. Moreover, weakness in the financial markets owing to trade fears and the tech sector’s headwinds are exerting pressure on oil prices as investors became more risk averse (read: Oil & Gas ETF Industry Outlook).

OPEC’s fears came true. Amid the rally in crude price 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 helped the nation beat Saudi Arabia and is on track to overtake Russia’s daily output of 11 million barrels/day.

What’s Impacting Prices?

The American Petroleum Institute (API) reported a surprise inventory build of 5.32 million barrels for the week ending Mar 23, weighing on prices. However, official data from the Energy Information Administration (EIA) later showed a build of 1.6 million barrels.

Talks of OPEC member nations and Russia to extend the production cut deal over the next 10 or 20 years supported crude prices. However, increased U.S. output has been weighing on crude lately. “Refinery maintenance is in full swing,” per a World Oil article citing Tamas Varga, an analyst at PVM Oil Associates. He added, “[This is causing] big builds in crude-oil stocks and big draws in products.”

Moreover, U.S. equity markets are going through a rough patch. Uncertainty around trade negotiations and recent concerns over Facebook’s data breach are weighing on the tech sector. This spooked investors and hurt their risk appetite, which in turn made investors reallocate their portfolios and reduce leveraged bets on risky asset classes like commodities (read: Will Trade War & Inflation Worries Spoil Dow ETF Party?).

Another possible explanation for the recent weakness in crude is profit taking, as crude’s rise last week owing to geopolitical worries involving Iran may have led traders to book profits.

What Lies Ahead?

Oil prices rallied in 2017, as global demand for the commodity surged and OPEC extended production cut plans. However, the recent increase in U.S. production coupled with fears of trade disruption might dent crude demand.  

However, John Bolton’s appointment as national security adviser has sparked concerns on the Trump administration’s take on how to tackle Iran. In case the United States withdraws out of the Iran nuclear deal and imposes sanctions on the country, it could weigh on Iran’s capability to export crude oil to the market, driving prices higher.

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 $1.9 billion and charges a fee of 77 basis points a year. The fund has returned 28.5% in a year and 8.6% 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 $591.5 million and charges a fee of 75 basis points a year. The fund has returned 39.5% in a year and 11.2% 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 $336.9 million and charges a fee of 75 basis points a year. The fund has returned 31.7% in a year and 9.8% 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 $93.9 million and charges a fee of 90 basis points a year. The fund has returned 24.0% in a year and 5.1% so far this year.

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