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Is it the Right Time to Invest in Oil ETFs? Let's Explore

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Oil market has been extremely volatile in 2020, starting from Middle-East tensions to coronavirus-led demand slowdown. However, after plunging into the negative territory for the first time ever in April, the West Texas intermediate (WTI) crude has started gaining on improved prospects of the oil market and better supply and demand management. Going on, the benchmark Brent crude surged to a three-month high level of above $42 a barrel on Jun 5, after plunging below $20 in April.

Riding the tide, Saudi Arabia has announced some of the biggest price increases for crude exports in at least two decades, removing almost all of the discounts it provided during its short-lived price war with Russia (per a Bloomberg article). Let’s look at the factors driving the upside in oil.

Curbed Oil Production

OPEC and its allies, including Russia, have decided to extend record oil production cuts until the end of July, which involves withdrawing nearly 10% of global supplies from the market. Initially, the deal was to cut supply by 9.7 million barrels per day (bpd) during May-June followed by cutting 7.7 million bpd from July to December (per a Bloomberg article). The group also urged countries like Nigeria and Iraq, which surpassed production quotas in the months of May and June, to compensate by additional production cuts in July to September (per The Guardian article).

Meanwhile, Saudi Arabia had earlier pledged to cut production by an additional one million barrels per day starting June. UAE and Kuwait will also undertake additional cuts of 1.18 million barrels per day in June.

Rebound in Oil Demand

The decision to continue the production cuts has come at a time when the global demand for oil is rebounding as economies reopen. The estimates from the International Energy Agency (IEA) show a bright picture. For 2020, the IEA now expects global crude demand decline of 8.6 million barrels a day versus its April forecast of a decline of 9.3 million barrels a day.

Oil ETFs That Might Gain

Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).

United States Oil Fund (USO - Free Report)

The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: Top ETF Stories of May).

AUM: $5.28 billion

Expense Ratio: 0.73%

Invesco DB Oil Fund (DBO - Free Report)

The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: Is the Worst Over for Oil ETFs?).

AUM: $542.1 million

Expense Ratio: 0.78%

United States Brent Oil Fund (BNO - Free Report)

The fund tracks the daily price movement of Brent crude oil (read: 4 ETF Areas Up At Least 20% in May).

AUM: $462.4 million

Expense Ratio: 0.90%

United States 12 Month Oil Fund (USL - Free Report)

The fund replicates with possible accuracy the movement of West Texas Intermediate light, sweet crude oil.

AUM: $340.4 million

Expense Ratio: 0.82%

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