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Hedge Funds Bet Big on Oil: ETFs in Focus

Sanghamitra Saha

Oil suffered a great deal in 2018, especially in the fourth quarter. Concerns over rising output amid softer-than-expected U.S. sanctions on Iran and falling demand from global growth worries weighed on oil prices in the fourth quarter. Overall, United States Oil USO and United States Brent Oil BNO have lost about 19.7% and 14.6% in the past year (as of Jan 3, 2018) (read: 4 Worst ETF Areas of Q4).

Is the Outlook Bright for 2019?

In early December, OPEC and Russia reached an agreement to cut output by 1.2 million barrels per day during the two-day 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.

The fresh output cut deal is applicable for the first six months of 2019, with a review scheduled for April. The group has used October output levels as a reference point for cuts. Iran got an exemption from the cuts as it is already facing U.S. sanctions(read: Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?).

Hedge funds are hopeful on this deal. Their net-long position -- the difference between bets on higher Brent prices and on a falloff -- rose 6.7% to 162,249 contracts -- for the six days ended Dec 24, per ICE Futures Europe data, as quoted on Bloomberg. In fact, short positions declined to the lowest level from late November.

Already, OPEC oil supply dropped in December by the biggest amount in almost two years, per Reuters. While Saudi and the United Arab Emirates posted large voluntary cuts, the third largest was an unintentional cut by Libya, where unrest caused the shutdown of the country’s biggest oilfield. Output from Iran has also fallen due to U.S. sanctions.

Analysts surveyed by Bloomberg forecast Brent to average $70 a barrel in 2019 as OPEC’s output cut is put into effect and there are involuntary output losses in Venezuela and Iran. Also, oil prices have been on an uptrend of late on hopes of U.S.-Chinese trade truce. Officials from both countries are currently discussing in Beijing on trade negotiations.   

If this happens, 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

US Commodity Funds United States 12 Month Oil USL

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

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