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Oil Price Rebound, USO ETF & More

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  • (1:30) - Why Are Oil Prices Down So Low This Year?
  • (7:45) - The Difference Between WTI and Brent Oil: Futures vs Physical Markets
  • (11:05) - Why Did Oil Futures Prices Go Negative?
  • (15:15) - Oil In A Post Pandemic Environment: Can Oil Continue Its Rebound?
  • (23:50) - What Sectors Of The Energy Market Should Investors Be Watching?
  •     Podcast@Zacks.com

 

In this episode of ETF Spotlight, I speak with Stacey Morris, Director of Research at Alerian, and Paul Baiocchi, Senior Investment Strategy Advisor at ALPS.

Monday, April 20, was a historic day for the oil markets as the price on the futures contract for West Texas crude fell to minus $37.63 a barrel. No one wanted to take delivery as there is no place to store the oil.

Despite an impressive rebound this week, oil prices are still down about 60% this year.

Oil has been under pressure for the past several months, even before the coronavirus brought global travel to a halt. Energy was the worst performing sector last year. What happened to oil prices?

The world’s largest oil ETF—the United States Oil ETF (USO - Free Report) —has seen millions in inflows  over the past few weeks. Demise of many other oil ETFs and ETNs, particularly leveraged ones lately, made this ETF more appealing to retail investors looking to bet on a rebound.

Many investors did not know that this ETF tracks oil futures contract, not the spot price. Every month this fund had to sell the nearest contract and buy the next month contract. When the futures market is in contango, the rollover results in losses for investors. The ETF is down more than 80% this year itself. What do investors need to know about oil futures and contango?

With the implosion in oil prices, USO has made many changes in its strategy in the past few days. Investors should remember that leveraged, inverse and futures tracking products are meant for active traders.  They are not meant for retail investors who do not understand them properly.

The ProShares Ultra Bloomberg Crude Oil (UCO - Free Report) which provides 2x the daily return of an index of futures contracts of WTI, and the Invesco DB Oil ETF (DBO - Free Report) which aims to minimize the impact of contango through optimized contract selection, have also experienced large inflows. UCO and DBO are down 97% and 47% respectively in 2020.

Oil has recovered strongly this week as many parts of the economy have started reopening. Can this rebound continue? Will global oil demand recover to pre-pandemic levels given rising investor interest in ESG strategies?

Which areas of the energy market look attractive now? Tune into the podcast to learn more.

Make sure to be on the lookout for the next edition of ETF Spotlight and also make sure to subscribe! If you have any comments or questions, please email podcast@zacks.com.

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