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What's Next for Oil ETFs After Fresh OPEC Output Cut?

Sanghamitra Saha
Mutual Fund Report for TRMCX

As expected, OPEC and non-OPEC oil behemoth Russia have decided to protract oil production cuts until the end of 2018 after hours of dialogue in Vienna, as per an article published on CNBC.com. The deal to reduce oil output by 1.8 million barrels a day was first undertaken a year ago by the 14-member OPEC cartel, Russia and nine other global producers.

The deal, initially slated to end in March 2018, was extended later. This time, instead of prolonging the existing agreement by nine months, the group signed a new deal which is will be valid from January to December 2018.

Plus, Nigeria and Libya (OPEC members excused from the deal), “have agreed not to increase their output next year above 2017 levels, according to the news agencies.” OPEC president Al-Falih indicated that this will help the oil market from experiencing any sudden shock in 2018. The success of the deal will be reviewed at the next meeting in June 2018. That keeps the door open for the probability of eliminating or correcting the agreement in six months’ time.

Will This Help the Oil Patch in 2018?

While such an arrangement looks bright for the oil patch heading into 2018, and psyches up energy investors who expect a sharp rebound in oil prices, the surging U.S. output will remain a concern. The EIA has already said that U.S. oil output surged in September. Oil production touched 9.48 million b/d in September, marking a 3.2% sequential increase and a 10.8% year-over-year jump (read: Oil in Bear Market: 4 Country ETFs to Shun).

Is There Any Hope?

As quoted on oilprice.com, “when asked about the rapid comeback of U.S. shale, Al-Falih cited the dramatic decline from conventional and mature oil fields , a depletion rate that means each year the market needs several million barrels per day of fresh supply. He doesn’t believe that “shale can carry the load.”

OPEC recently beefed up its forecast for oil demand in the coming decades despite a drive to enhance green energy and a rise in the usage of electric cars. OPEC expects global consumption will increase from 95.4m barrels a day in 2016 to 102.3m b/d in 2022. This marks a positive revision of almost 2.3m b/d. The projection for longer-term oil demand has been raised by 1.7m b/d to 111.1m b/d by 2040.

Simply put, rising global demand on higher global growth and depletion from mature oil fields may be able to push up oil prices in the year to come and in the next (read: 4 ETFs to Capitalize on the Oil Rally).

How to Profit?

Overall, sentiments are mixed. So, oil is expected to move sideways in the days to come. There could a be short-term bane and long-term boon. Investors who are bullish on oil ETFs at this stage can play United States Oil Fund USO, iPath S&P GSCI Crude Oil Index ETN OIL and ProShares Ultra Bloomberg Crude Oil UCO.

And investors who think surging shale production will put OPEC extension deal to rest can target inverse oil ETFs like ProShares UltraShort Bloomberg Crude Oil SCO, DB Crude Oil Double Short ETN DTO, ProShares Daily 3x Inverse Crude ETN WTID and VelocityShares 3x Inverse Crude Oil ETN DWTI (read: How to Trade the Oil Rally with ETFs & Stocks).

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US-OIL FUND LP (USO): ETF Research Reports
 
OIL INDEX (UA) (OIL): ETF Research Reports
 
PRO-ULS BB CRUD (SCO): ETF Research Reports
 
DB CO DS (DTO): ETF Research Reports
 
PRO-ULT BB CRUD (UCO): ETF Research Reports
 
E-TRC PRS 3XIC (WTID): ETF Research Reports
 
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