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Crude Oil ETFs Surge Amid Potential Production Limits

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Ian Young
·3 min read
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This article was originally published on ETFTrends.com.

Crude oil prices are surging on Monday, in company with a number of other commodities, and supported by expectations that the oil production limits by OPEC+ would compress the market in the first quarter.

On the first day of February, U.S. benchmark WTI Crude advanced 2.91% to trade at $53.72, as the international benchmark Brent Crude gained as well.

Crude ETFs gained amid the news as well with the United States Oil Fund (USO) adding 2.64%, while the ProShares Ultra Bloomberg Crude Oil (UCO) gained more than 5.2%.

After adding around 8 percent in the prior month, crude prices started off February strong, buoyed by Saudi Arabia’s commitment to slash its crude oil output by an additional 1 million barrels per day (bpd) beyond its quota in the OPEC+ pact.

In addition, commodities are being stimulated by a frenzy of retail traders attempting to thwart hedge funds. This noise is projected by some to spill into the crude oil market as well.

In China, the purchasing managers’ index (PMI) showed that the Chinese economy remained robust in January, continuing to increase, though at a slower pace.

Yet, traders pushed aside the coronavirus news, as well as the sluggish pace of the vaccine rollout to concentrate instead on the expected tighter market in the coming months.

Technical Oil Indications Bode Well

The futures curve of the Brent contract illustrated further signs on Monday that market participants project the tighter market to aid in an expeditious drawdown of inventories.

According to Bloomberg estimates, the second-month contract in Brent is now the most exorbitant one versus the third-month in over a year, signaling deeper backwardation, a state of the market that implies limited supplies with the prices of the nearer futures contracts higher than those further out in time.

Key financial player Goldman Sachs also offered a bullish message for crude this week, saying in a note that it anticipates global oil demand to recover to pre-pandemic levels of 100 million bpd by this summer.

According to Goldman, the oil market was short 2.3 million bpd in the final quarter of 2020. While supply is still tight at the start of 2021, the bank sees all that changing by August of this year.

Goldman said that oil stores will still climb this year, with the deficit narrowing to 900,000 bpd during the first half of the year. That’s up from an earlier projection of a deficit of 500,000 bpd. But Goldman Sachs’s commodities chief Jeffrey Currie projects Brent crude to climb to $65 a barrel this year, citing structural underinvestment in the industry.

For investors looking for other crude ETFs to play the run-up in oil, which has been fairly steady since November, the United States 12 Month Oil Fund (USL) and the iPath Pure Beta Crude Oil ETN (OIL) are two other funds to consider.

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