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4 ETFs to Capitalize on the Oil Rally

Sanghamitra Saha

Putting all worries over supply glut to bed, oil prices jumped on Sep 25. This liquid commodity is now hovering around the $50 level. Notably, Brent crude touched its highest level in more than two years while U.S. crude surpassed $52 a barrel for the first time in four months. United States Oil USO was up about 3% while United States Brent Oil BNO gained more than 3.9% on the day.

As per Reuters, key producers indicated that the global oil market is finally going to be rebalanced, while “Turkey threatened to cut oil flows from Iraq's Kurdistan region towards its ports”. Turkey announced that it may remove a pipeline that transports oil from northern Iraq to the global market, in order to put pressure on the Kurdish autonomous region over its independence referendum. The Iraqi government does not acknowledge the referendum and has turned to foreign allies to cease importing Kurdish crude (read: How to Trade the Oil Rally with ETFs & Stocks).

Market watchers now believe that the OPEC output cut is finally bearing fruit. However, as per analysts though both WTI and Brent contracts rose, worries about U.S. supply glut kept gains on WTI in check. The spread between WTI and Brent futures widened to $6.61, its steepest since August 2015, as per an article published on Reuters.

Demand-Induced Jump in Oil Prices

In any case, oil prices have been steady lately. WTI crude ETF USO and BNO were up 8.7% and 13.5% in the last one month (as of Sep 25, 2017). Energy Select Sector SPDR ETF XLE added about 10.1% in the last one month.

The reason behind the uptrend was believed to be the possibilities of the OPEC discussing the extension of the output cut deal, as per a portfolio manager at Tortoise Capital. Not only this, demand jumped 2.4% in the second quarter of 2017.

This led International Energy Agency (IEA) to upgrade its global oil demand estimate for this year. Along with the demand-induced rally, OPEC output declined in August for the first time in five months. There are indications the U.S. output growth is also slowing. The number of oil rigs operating in the United States fell lately. As a result, hedge funds increased their bets that oil prices will go higher from here, quoted on CNBC.com.

How to Play?

Amid the fresh round of optimism, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, we have highlighted a few ETF investing options:

Direxion Daily Energy Bull 3x Shares ERX

This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. ERX was up 4.6% on Sep 25 (read: Capex Cuts Are Back: What's in Store for Energy ETFs?).

SPDR S&P Oil & Gas Equipment & Services ETF XES

This fund provides equal weight exposure across 37 securities by tracking the S&P Oil & Gas Equipment & Services Select Industry Index. The fund added about 3.4% on Sep 25.

PowerShares S&P Small-Cap Energy Portfolio PSCE

The underlying index of the fund – the S&P SmallCap 600 Capped Energy Index – looks to measure the performance of the small-cap U.S. energy companies. The fund gained more than 3.6% on Sep 25.

VanEck Vectors Russia ETF RSX

Oil is seemingly the main commodity of Russia. About half of Russia’s exports in terms of value come from oil and natural gas as the country has the third-largest oil reserve in the world and the biggest natural gas reserve. This makes it clear why Russia’s economy is highly dependent on the oil price movement. RSX is the most popular and liquid option in the space. The fund gained about 1.9% on Sep 25 (read: Oil Again in Bull Market: 4 Country ETF Winners).