Back to top

Image: Bigstock

Virus Scare Weighs on Oil ETFs: Go Short for the Near Term

Read MoreHide Full Article

China’s SARS-like coronavirus outbreak threatened the commodity market apart from the stock market. Among many commodities, oil was impacted massively. Brent suffered its steepest weekly drop in more than a year on concerns of the virus spreading through Asia.

Authorities in China reported about 140 new cases of coronavirus last week, according to Reuters. By Jan 26, the death toll was 80 among 2744 cases. What’s more, there were 17 cases confirmed in Hong Kong, Macao and Taiwan. Rest of Asia, Europe, North America and Australia have confirmed cases of 26, 3, 6 and 4, respectively (read: Sector ETFs & Stocks to Gain/Lose on Coronavirus Outbreak).

China’s Wuhan area was the epicenter of the disease, which is now spreading fast to other parts of the country, forcing China to enact coronavirus lockdown to more cities, limiting movement to an unprecedented 56 million people.

How is Oil Impacted?

China is the world's second-largest oil consumer. Needless to say, the virus outbreak has lowered travel demand and shaken the oil market. Traveling is affected on the global level too as in evident from the drop in jet and diesel fuel demand.

Investors should note that the SARS outbreak in 2003 was estimated to have hurt 30% of travel and tourism employment in affected areas like China, Hong Kong, Singapore, Taiwan Province and Vietnam, per UN. Australia, Fiji, Indonesia, Kiribati, Malaysia, New Zealand, Philippines and Thailand were estimated to have lost about 15% of the travel employment. The impact on the rest of the world was an average 5%. This explains the impact of such outbreaks on travel demand.

JPM Commodities Research now expects “a price shock of up to $5 (a barrel) if the crisis develops into a SARS-style epidemic.” The bank retrained its forecast for Brent to average $67 in the first quarter and $64.50 throughout 2020.

Moreover, Middle-East tensions at the start of the year have probably made oil prices slightly elevated. Hedge funds positioning has been more bullish in recent times, per a Reuters market analyst. As a result, the eruption of Coronavirus has hurt the space all the more. 

 Investors should note that WTI crude ETF United States Oil Fund LP (USO - Free Report) lost about 2% on Jan 24 and was off 6.6% last week. Brent crude ETF United States Brent Oil Fund LP (BNO - Free Report) shed more than 19% on Jan 24 and retreated 5.9% in the past week.

Inside the Performance of Bull & Bear Oil ETFs

Against this backdrop, we highlight the price performance of the Oil ETFs last week.

Invesco DB Oil Fund (DBO - Free Report) (down 7.4%), iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL - Free Report) (down 7.4%), ETRACS S&P GSCI Crude Oil Total Return Index ETN (down 7.3%), iPath Pure Beta Crude Oil ETN (down 6.8%) and United States 12 Month Oil Fund (USL - Free Report) (down 6.5%) were among the prominent losers of the past week (read: What Do Q4 Earnings Say About Oil Service ETFs?).

Meanwhile, VelocityShares 3x Inverse Crude Oil ETN (up 24.8%), ProShares Daily 3x Inverse Crude ETN (WTID - Free Report) (up 24.5%), ProShares UltraPro 3x Short Crude Oil ETF (OILD - Free Report) (up 24.4%), ProShares UltraShort Bloomberg Crude Oil (SCO - Free Report) (up 15.8%) and DB Crude Oil Double Short ETN (DTO - Free Report) (up 12.9%) were among the notable gainers.

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 >>

Published in