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Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?

After a long discussion, OPEC and Russia finally reached an agreement to cut output by 1.2 million barrels per day during the two-day OPEC meeting in Vienna to drain supply glut and boost prices. Under the deal, OPEC and Russia will cut 800,000 bpd and other top non-OPEC oil producers will be responsible for the rest (read: Output Cut Quota Not Decided Yet: Short Oil & Energy ETFs).

OPEC’s 14 members – before Qatar’s leaving this month – control 35% of global oil supplies and 82% of proven reserves. With the inclusion of the 10 non-OPEC nations, among which Russia, Mexico and Kazakhstan are the most notable, the share of global oil supplies and proven reserves rose to 55% and 90% respectively. So, an output cut deal at the OPEC+ is pretty important to the oil patch.

OPEC started cutting supply in partnership with Russia and several other nations from last year to boost oil prices. Though the liquid commodity staged a rebound at first, surging U.S. supplies and softer-than-expected U.S. sanctions against Iran’s energy sector pushed the commodity into the bear market recently (read: Brent in Bear Market: 4 Country ETFs to be Cautious About).

Inside the New Deal

The group has used October output levels as a reference point for cuts, which will go on for six months beginning in January with a review scheduled for April. Iran got an exemption from the cuts as it has already been pressured by U.S. sanctions.

Libya and Venezuela have also been excluded from the list which will conform to the output cut. The agreed-upon cut is almost in line with a recommendation (1.3 million barrels) last week from OPEC's Economic Commission Board.

Is the Cut Enough to Restore Oil Patch?

"A production cut of 1.2 million b/d would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent," per Ann-Louise Hittle, a VP at Wood Mackenzie energy consultancy group.

Brent crude ETF United States Brent Oil BNO gained about 2.2% on Dec 7, 2018. Still, the current price is 28% down from the yearly high hit in early October.  The muted price reaction is because of the fact that the output cut deal is largely priced-in at the current level.

Investors should also note that there have been flare-ups in U.S.-Sino trade tensions, after the arrest of CFO of Huawei – a Chinese tech behemoth – in Canada.  Moreover, there was a deeper-than-expected contraction in the Japanese economy in the third quarter. The Euro zone economy too grew at its weakest clip in four years in the third quarter of 2018. China’s manufacturing activity also stalled in November. All these stir global growth concerns all over again. (read: China's Manufacturing Stalls in November: ETFs in Focus).

What Lies Ahead?

In the coming days, oil is likely to be stuck between two opposing forces – global growth worries and OPEC output cut. So, investors should keep a close eye on the commodity and the related ETFs.

ETFs in Focus

This has compelled many investors to look into the oil commodity world and these ETFs.

United States Brent Oil Fund (BNO)

United States Oil Fund (USO)

Invesco DB Oil Fund (DBO)

US Commodity Funds United States 12 Month Oil (USL)

We highlight a few regular energy ETFs that should also be watched closely.

Invesco S&P SmallCap Energy ETF (PSCE)

VanEck Vectors Unconventional Oil & Gas ETF FRAK

SPDR S&P Oil & Gas Exploration & Production ETF XOP

John Hancock Multifactor Energy ETF JHME

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JH-M-F ENERGY (JHME): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
SPDR-SP O&G EXP (XOP): ETF Research Reports
 
PWRSH-SP SC EGY (PSCE): ETF Research Reports
 
US-12 MONTH OIL (USL): ETF Research Reports
 
VANECK-UNC O&G (FRAK): ETF Research Reports
 
PWRSH-DB OIL FD (DBO): ETF Research Reports
 
US BRENT OIL FD (BNO): ETF Research Reports
 
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