Oil has been seeing rough trading over the past one month. The choppiness is likely to continue in the coming weeks thanks largely to the Iran nuclear deal that eased fears of the Middle East supply disruption. The Middle East is one of the major oil producers and accounts for one-third of the world’s total oil output(read: Oil ETFs in Focus Ahead of Iran Talks).
Iran Deal Eases Oil Supply Tensions
Iran and world powers entered into a preliminary six-month accord in which Iran would curb its nuclear activities in exchange for easy international sanctions on oil, auto parts, gold and precious metals. This marks the first step toward resolving the decade-long diplomatic tension over the nuclear dispute and spreading optimism across the Middle East nations, leading to declining oil prices.
The deal also raises hopes for a more comprehensive agreement that could allow Iran to restore oil production to pre-sanction levels. If this happens, it would add one million barrels per day of oil to world markets by next year and improve long-term oil supply conditions. Consequently, this would further put pressure on the global oil prices (read: Play the U.S. Oil Boom with These Energy ETFs).
Further, weak global demand due to slowing economic growth would push oil prices down. The EIA projects global demand to fall to 91.39 million barrels per day in 2014 from the previous expectation of 91.43 million barrels per day.
Mixed Market Reactions
Following the Iran deal in the weekend, Brent oil slid over $2 in early trading on Monday while crude oil slipped 90 cents. Most of this decline was recouped on Tuesday trading on the market opinion that Iran would take some time to increase its production.
Even if the long-term deal is reached anytime soon, Iran could take three to nine months to recover the one million barrels per day in production lost since 2011. Further, with restricted sanctions on oil and banking, oil price will not remain low for long (read: 3 Country ETFs to Buy on an Oil Surge).
The mixed sentiment has put oil ETFs in focus for the coming weeks. These ETFs might be easier plays for investors seeking to deal directly in the futures market. Below, we have highlighted a few popular oil ETFs that could be interesting plays in the coming days, given the volatile trading in oil.
United States Brent Oil Fund (BNO)
This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $30.6 million in its asset base and trades in moderate volume of roughly 56,000 shares a day.
The ETF charges 75 bps in annual fees and expenses. BNO gained nearly 4% over the past 10 trading sessions and over 6.5% in the year-to-date period.
United States Oil Fund (USO)
This is the most popular and liquid ETF in the oil space with AUM of over $1.3 billion and average daily volume of over 5.9 million shares. The fund seeks to match the performance of the spot price of light sweet crude oil West Texas Intermediate (WTI). The ETF has 0.45% in expense ratio.
The ETF lost about 3.34% in the past 10 days but is up 1.35% so far this year (read: A Comprehensive Guide to Oil & Gas ETFs).
PowerShares 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 sees solid average daily volume of more than 146,000 shares and AUM of $324.8 million. It charges annual fees of 79 bps from investors.
DBO lost 0.19% in the past 10 trading sessions while it is up around 4% in the year-to-date period.
iPath S&P GSCI Crude Oil Index ETN (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 (see: all the Energy ETFs here).
The note has amassed $290.4 million in AUM so far and does volume of roughly 532,000 shares a day. It charges 75 bps in fees per year from investors. The ETN was down 3.75% in the trailing 10 days while added 1.28% in the year-to-date period.
Based on sluggish global demand given slowing global growth and increasing supplies on the back of modern technological advancements and political stability in producing countries, crude fundamentals appear bleak.
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