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Oil prices have been on a tear this year. U.S. crude rose above $68 per barrel while Brent oil breached a $73 per barrel in recent trading. A host of factors led oil to a three-year high. WTI crude ETF United States Oil (USO - Free Report) and Brent ETF United States Brent OilBNO have added about 9% and 5.8% so far this year (as of Apr 18, 2018) (read: Is This the Time to Play Beaten-Down MLP ETFs?).
A Drop in U.S. Oil Inventory
In the United States, the Energy Information Administration (EIA) noted on Wednesday that commercial crude stocks dropped by 1.1 million barrels in the week to Apr 13, to 427.57 million barrels, which is almost in line with the the five-year average level of around 420 million barrels.
The American Petroleum Institute (API) also reported a decline of 1.047 million barrels of United States crude oil inventories for the week ending April 13, matching analysts’ expectations. Analysts expected a draw in crude oil inventories of 1.429 million barrels.
Surging U.S. crude production has long been oil investors’ cause for concern. This only threat was keeping the OPEC-led output cut deal from pushing up oil prices further. Needless to say, news of a fall in U.S. oil inventory will boost the commodity prices.
Chances of Extension in Output Cut Deal
There are chances of an extended output cut deal for the coming 10 or 20 years thanks to the initiative between OPEC member nations and Russia. As per sources, OPEC top brass and the biggest exporter Saudi Arabia wants oil to push to the level of $80 or even $100.
This indicates Saudi’s likely intension in making no changes in the ongoing output cut deal that started in Jan 2017. Talks are rife that OPEC could “keep capping oil production after the current deal expires in December.”
The deal has so far been a success by OPEC’s parameters. Oil stocks in developed economies in February were just 43 million barrels above the latest five-year average, down from 340 million barrels above in January 2017.
Geopolitical Concerns
Geopolitical risks in the Middle East, especially the strained relationship between Saudi and Iran, can act as a key driver. Following a chemical attack on Syria, Russia and Iran have been condemned internationally for supporting to the Syrian president. Oil price reached the highest level in three years on fears of an international strike on Syria.
Though Syria is not a key oil producer, if military action takes place in the region, crude flows across the wider Middle East, which is one of the major oil producers and accounts for one-third of the total world’s oil, could be disrupted. Plus, the possibility of the United States posing new sanctions against Iran is also driving oil price higher (read: Oil Price Jumps on Syria Turmoil: ETFs & Stocks to Trade).
Venezuela Crisis
Venezuela, which has the world's largest proven oil reserves, has been registering a decline in crude production in recent years. IEA warned that Venezuela’s situation is worse enough to send the oil market into deficit (read: 6 Reasons to Buy These Energy ETFs and Stocks Now).
Leveraged Oil ETFs in Focus
While there are several ETFs to play the rally in oil prices, we have highlighted threeleveraged products that can give investors inflated returns in an oil boom.
ProShares Ultra Bloomberg Crude Oil looks to offer exposure to two times the daily performance of the Bloomberg WTI Crude Oil Subindex. The product charges 95 bps in fees (read: Energy ETFs Rally: Will the Gains Last?).
UBS ETRACS - ProShares Daily 3x Long Crude ETN (WTIU - Free Report) – Up 24.5% YTD
The product is an exchange-traded note linked to the daily compounded 3x leveraged performance of the Bloomberg WTI Crude Oil Subindex ER, less investor fees. Its expense ratio is 1.45%.
United States 3x Oil Fund – Up 23.9% YTD
The product seeks to reflect three times the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. Total expense ratio of the fund is 1.00%.
Bottom Line
The leveraged investing strategy is highly beneficial for short-term traders and it could lead to huge losses compared to traditional funds in volatile markets. So, it’s better to invest in a leveraged product as long as the trend is your friend.
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Should You Consider Leveraged Oil ETFs Now?
Oil prices have been on a tear this year. U.S. crude rose above $68 per barrel while Brent oil breached a $73 per barrel in recent trading. A host of factors led oil to a three-year high. WTI crude ETF United States Oil (USO - Free Report) and Brent ETF United States Brent Oil BNO have added about 9% and 5.8% so far this year (as of Apr 18, 2018) (read: Is This the Time to Play Beaten-Down MLP ETFs?).
A Drop in U.S. Oil Inventory
In the United States, the Energy Information Administration (EIA) noted on Wednesday that commercial crude stocks dropped by 1.1 million barrels in the week to Apr 13, to 427.57 million barrels, which is almost in line with the the five-year average level of around 420 million barrels.
The American Petroleum Institute (API) also reported a decline of 1.047 million barrels of United States crude oil inventories for the week ending April 13, matching analysts’ expectations. Analysts expected a draw in crude oil inventories of 1.429 million barrels.
Surging U.S. crude production has long been oil investors’ cause for concern. This only threat was keeping the OPEC-led output cut deal from pushing up oil prices further. Needless to say, news of a fall in U.S. oil inventory will boost the commodity prices.
Chances of Extension in Output Cut Deal
There are chances of an extended output cut deal for the coming 10 or 20 years thanks to the initiative between OPEC member nations and Russia. As per sources, OPEC top brass and the biggest exporter Saudi Arabia wants oil to push to the level of $80 or even $100.
This indicates Saudi’s likely intension in making no changes in the ongoing output cut deal that started in Jan 2017. Talks are rife that OPEC could “keep capping oil production after the current deal expires in December.”
The deal has so far been a success by OPEC’s parameters. Oil stocks in developed economies in February were just 43 million barrels above the latest five-year average, down from 340 million barrels above in January 2017.
Geopolitical Concerns
Geopolitical risks in the Middle East, especially the strained relationship between Saudi and Iran, can act as a key driver. Following a chemical attack on Syria, Russia and Iran have been condemned internationally for supporting to the Syrian president. Oil price reached the highest level in three years on fears of an international strike on Syria.
Though Syria is not a key oil producer, if military action takes place in the region, crude flows across the wider Middle East, which is one of the major oil producers and accounts for one-third of the total world’s oil, could be disrupted. Plus, the possibility of the United States posing new sanctions against Iran is also driving oil price higher (read: Oil Price Jumps on Syria Turmoil: ETFs & Stocks to Trade).
Venezuela Crisis
Venezuela, which has the world's largest proven oil reserves, has been registering a decline in crude production in recent years. IEA warned that Venezuela’s situation is worse enough to send the oil market into deficit (read: 6 Reasons to Buy These Energy ETFs and Stocks Now).
Leveraged Oil ETFs in Focus
While there are several ETFs to play the rally in oil prices, we have highlighted threeleveraged products that can give investors inflated returns in an oil boom.
Ultra Bloomberg Crude Oil (UCO - Free Report) – Up 17.3% YTD
ProShares Ultra Bloomberg Crude Oil looks to offer exposure to two times the daily performance of the Bloomberg WTI Crude Oil Subindex. The product charges 95 bps in fees (read: Energy ETFs Rally: Will the Gains Last?).
UBS ETRACS - ProShares Daily 3x Long Crude ETN (WTIU - Free Report) – Up 24.5% YTD
The product is an exchange-traded note linked to the daily compounded 3x leveraged performance of the Bloomberg WTI Crude Oil Subindex ER, less investor fees. Its expense ratio is 1.45%.
United States 3x Oil Fund – Up 23.9% YTD
The product seeks to reflect three times the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. Total expense ratio of the fund is 1.00%.
Bottom Line
The leveraged investing strategy is highly beneficial for short-term traders and it could lead to huge losses compared to traditional funds in volatile markets. So, it’s better to invest in a leveraged product as long as the trend is your friend.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>