Oil prices have been on a tear this year. WTI crude ETF United States Oil (USO - Free Report) and Brent crude ETF United States Brent Oil (BNO - Free Report) are up 18.6% and 14.1% this year, respectively. A host of favorable factors related to the news of supply disruption are adding strength to oil price, making the case for oil ETFs appealing.
The OPEC members cut a deal at the end of the first half of this year to boost output by a lower-than-expected margin. Saudi Arabia said the renewed deal will result in a nominal output rise of around 1 million barrels per day (bpd). Now it remains to be seen how far they conform to their deal and rebalance the oil market ahead (read: What Does the OPEC Agreement Mean for Energy ETFs?).
Apart from this, two contrasting developments have come up lately, one is United States’ sanctions against Iran and the other is a flare-up in trade tensions. Both factors should regulate the future oil market. Let’s delve a little deeper?
Re-imposition of Iran Sanctions to Boost Price
The latest U.S. sanctions on Iranian crude could sent oil prices above $90 a barrel in the fourth quarter, per an analyst, quoted on CNBC. As of the now, the sanctions are on trading in cars, and metals and minerals as well as buying U.S. and European aircraft. And the second part of sanctions that prohibits imports of Iranian energy will take place in November.
A significant output crunch is expected ahead, which can boost oil price. Though many thought that China — Iran’s single largest oil customer — will raise crude oil imports from Iran, China reportedly agreed not to boost the import quota (read: Is $100-a-Barrel Oil Possible? ETFs in Focus).
Trade War to Keep Prices Low
The heightening U.S.-Sino trade war is keeping hedge funds and other money managers from taking new positions in the WTI and Brent benchmarks, with bets falling to a two-year low.
The United States and China first targeted $50 billion worth of goods for import tariffs, out of which tariffs of $34 billion of goods were enacted on Jul 6. Now, the Trump administration is considering a hike in tariffs from 10% to 25% on another $200 billion worth of Chinese goods. In retaliation, China is threatening to impose tariff on $60 billion worth of American goods (read: 5 ETF Ways to Bet on China's New Tariff Threats).
The escalation of the trade spat sparked off concerns about the likely slowdown of global growth. The International Monetary Fund (IMF) expects global growth to slow down by 2020 as “major economies are flirting with trade war.” This could derail the economies from their reform agenda. Also, with several developed economies lately showing signs of weakness, investors should be wary of consumption growth in the oil patch.
What Lies Ahead?
Oil is stuck between two opposing forces and investors should keep a close eye on the commodity. Investors should note thatOPEC and Russia could boost their production in the coming days if Iranian output falls. If this happens, no supply constraint will be felt in the oil patch and oil price may slide.
ETFs in Focus
This has compelled many investors to look into the oil commodity world and these ETFs.
United States Brent Oil Fund (BNO - Free Report)
United States Oil Fund (USO - Free Report)
Invesco DB Oil Fund (DBO - Free Report)
US Commodity Funds United States 12 Month Oil (USL - Free Report)
ETRACS S&P GSCI Crude Oil Total Return Index ETN
We highlight a few regular energy ETFs that should be watched closely.
Invesco S&P SmallCap Energy ETF PSCE)
VanEck Vectors Unconventional Oil & Gas ETF (FRAK - Free Report)
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
John Hancock Multifactor Energy ETF (JHME - Free Report)
iShares US Oil & Gas Exploration & Production ETF (IEO - Free Report)
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 >>