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Spate of Positive News Boosts Oil ETFs

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After slipping into bear territory on trade war escalation and recession fears, oil prices received a boost from a slew of positive news including pick up in China's services sector and hopes of trade talks resumption (read: Oil Collapses to Bear Market: Bet on Inverse Energy ETFs).

A private survey showed that service activity in China expanded at the fastest pace in three months in August, providing some relief to oil markets. Notably, China is the world's second-largest oil consumer and largest importer. Meanwhile, trade talks between the two world superpowers are expected to resume in early October that is likely to ease global slowdown concerns, which in turn will drive the demand for oil.

This has resulted in a spike in oil ETFs. United States Brent Oil Fund (BNO - Free Report) emerged as a biggest winner, climbing 5.1% on Sep 4 while Invesco DB Oil Fund (DBO - Free Report) , United States Oil Fund (USO - Free Report) and iPath S&P GSCI Crude Oil Total Return Index ETN gained more than 4% each. Let’s dig into these ETFs quickly:

BNO

This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $83.9 million in its asset base and trades in a good volume of roughly 360,000 shares a day. The ETF charges 90 bps in annual fees and expenses.

DBO

This product provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund witnesses solid average daily volume of more than 251,000 shares and has AUM of $267 million. It charges an expense ratio of 0.78% (read: ETFs in Focus as Rising Trade War Tensions Hurt Oil Prices).

USO

This is the most popular and liquid ETF in the oil space with an AUM of $1.3 billion and an average daily volume of more than 26.2 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). The ETF has 0.73% in expense ratio.

OIL

This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $84.5 million in AUM and trades in a lower volume of 20,000 shares a day. Its expense ratio came in at 0.75%.

What’s In Store?

The rise in oil price seems short-lived given the negative sentiments building up in the space. This is especially true as OPEC oil production has risen for the first time this year in August buoyed by Nigeria and Saudi Arabia, which collectively raised production by 200,000 barrels per day to 29.99 million a day. Oil exports also rose to a four-month high.

According to International Energy Agency, global oil demand outlook is somber amid growing signs of an economic slowdown, which lowered consumption growth during the first five months of this year to the weakest in a decade. The agency cuts global oil demand growth outlook by 100,000 barrels per day for 2019 and 50,000 barrels per day for 2020 (read: Energy ETFs Crash on Rate Cut and New China Tariff).

Additionally, ongoing US-China trade war, and President Trump’s declaration to be even stringent regarding Beijing if he wins a second term in office will continue to drag oil price lower. Moreover, recession fears as indicated by the bond market will keep hurting the demand. Demand factor is playing a crucial role currently even though supply conditions are still tight given the declines in Venezuela, Iran, and potentially Libya, and the output cut deal.

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