Oil has been showing huge volatility this week with wild up and down swings. This is especially true as the weekend attacks on the heart of Saudi Arabia’s oil production facilities halted nearly half of Saudi's oil production, leading to the biggest oil price rally ever on Sep 16. However, price declined sharply on Sep 17, following a Reuters’ report that Saudi Arabia’s oil production will be restored to normal levels faster than initially expected (read: Saudi Attack Threatens Oil Supply: Energy ETFs Set to Soar).
Oil prices dropped more than 5% in a sudden move on Tuesday after report said Saudi Arabia’s oil production will be restored to normal levels faster than initially expected. Saudi is now close to restoring 70% of the production lost due to the attacks and Aramco’s output is expected to be fully back online in the next two to three weeks.
Currently, the oil outlook seems bleak given the waning demand though supply conditions are still tight given the declines in Venezuela, Iran, and potentially Libya, and the OPEC output cut deal. Recession fears have taken a toll on demand. OPEC oil production rose 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 (read: 5 Top-Performing Energy ETFs Over the Past Week).
The International Energy Agency slashed its global oil demand growth forecast for this year and next, citing fears of an economic downturn due to the U.S.-China trade war. The agency expects oil demand growth to reach 1.1 million barrels per day in 2019 and 1.3 million barrels per day in 2020. This is a downward revision of 100,000 barrels per day for this year and 50,000 barrels per day for next year. Additionally, the agency raised non-OPEC supply growth to accelerate from 2.1 million barrels per day to 2.2 million barrels per day in 2020 as Brazil picks up speed and new projects start up in Norway and Guyana.
Given the abrupt changes in oil price and an uncertain outlook, investors should place their bet on oil ETFs cautiously or take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.
These ETFs might be easier plays for investors seeking to deal directly in the futures market.
United States Oil Fund USO: This is the most popular ETF in the oil space with an AUM of $1.6 billion and 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 (read: Guide to 25 Most-Liquid ETFs).
United States Brent Oil Fund BNO: This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through futures contracts. It has amassed $92.2 million in its asset base and charges 90 bps in annual fees and expenses.
Invesco DB Oil Fund 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 has AUM of $293.2 million and charges an expense ratio of 0.78%.
Leveraged Oil ETFs
Investors who are bullish on oil may consider a near-term long on the commodity with the following ETFs depending on their risk appetite.
ProShares Ultra Bloomberg Crude Oil ETF UCO: This fund seeks to deliver twice (2x or 200%) the returns of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $424.9 million in AUM and expense ratio of 0.95%.
VelocityShares 3x Long Crude Oil ETN UWT: This seeks to deliver thrice (3x or 300%) the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $425.8 million in its asset base. The ETN charges a higher fee of 1.50% per year (read: Leveraged Oil & Energy ETFs to Play on Saudi Attack).
ProShares UltraPro 3x Crude Oil ETF : This ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $137 million in its asset base and charges investors 95 bps in annual fees.
United States 3x Oil Fund USOU: This fund also offers three times the daily price movements of WTI oil, charging investors 1.51% in expense ratio. It has accumulated $23.7 million in its asset base.
Inverse Oil ETFs
Any negative news flow could provide investors a near-term short opportunity on the commodity according to their risk appetite.
ProShares UltraShort Bloomberg Crude Oil SCO: This fund seeks to deliver twice the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $65.6 million in its asset base and charges 95 bps in fees and expenses.
DB Crude Oil Double Short ETN DTO: This ETN provides two times inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude. It has amassed $15.5 million in its asset base and charges 75 bps in fees per year (see: all the Inverse Commodity ETFs here).
ProShares UltraPro 3x Short Crude Oil ETF OILD: This fund seeks to deliver thrice the daily inverse performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $24.5 million in its asset base and charges 95 bps in fees and expenses.
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