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Will Oil Continue Riding the Trump Mojo? ETFs in Focus

Sanghamitra Saha
·4 min read

President Trump did a big favor to oil recently. His tweets implying that he expects Saudi Arabia and Russia to reach an agreement for a considerable production cut sent oil rallying on Apr 2 and helped the commodity post a record single-day jump (about 25%).

Oil has been battered this year due to a price war instigated by a collapse of the three-year long OPEC+ pact, which resulted in a price war between Saudi Arabia and Russia. Initially, Saudi wanted to prolong the deal after March but failed to gather Russia’s support.

This brought oil down to an almost two-decade low. Even after Thursday’s rally, WTI crude ETF United States Oil Fund, LP USO is down 60% this year, while United States Brent Oil Fund, LP BNO is off 56.6% (read: Top ETF Stories of First Quarter).

Will the Rally Last?

There high chances this euphoria wont last long even if Saudi and Russia cut a deal. As the time will progress, coronavirus spread and the resultant decline in activities will likely take center stage and keep hurting oil demand.

The cost of the coronavirus pandemic could be as high as $4.1 trillion or 4.8% of global GDP if there is a greater demand shock, per Asian Development Bank, quoted on Bloomberg. However, a shorter containment period and the resultant smaller demand shock could limit global GDP loss to 2.3%. Whatever be the case, oil demand is extremely vulnerable in the near term.

Then, one should note that oil has rallied on Apr 2 based on Trump’s expectations. Otherwise, we do not have any clarity on the deal as yet. On Apr 1, Trump said that he expects a deal to end a price war to be made in a “few days” while on Apr 2 he tweeted that he had spoken with the crown prince of Saudi Arabia, who in turn, had spoken with Russian president Vladimir Putin.

Instead, Kremlin commented that talks with Saudi Arabia “have not begun” and “are not planned,” though Russia noted that “no one is happy with this [oil market] situation.” The final words keep chances open for Russia on agreeing to an output cut deal, even if it is smaller in size.

ETFs in Focus

Apart from the oil commodity ETFs, Oil & Gas Exploration & Production ETFs likeEnergy Select Sector SPDR Fund XLE (up 9.2% on Apr 2), Vanguard Energy Index Fund ETF Shares VDE (up 8.8% on Apr 2) and iShares U.S. Energy ETF IYE (up 9.1%) should be monitored closely. If oil prices continue to gain, these oil explorer ETFs will rally.

These ETFs are known for high yield too. XLE (yield 14.80%), VDE (yield 7.65%) and IYE (yield 14.48%) can thus be tapped for solid current income as companies may not be forced to cut/halt dividends amid an improving operating environment (read: Solid Insider Buying Puts These Stocks & ETFs in Focus).

The second in line in terms of gains comes refiners’ ETFs like VanEck Vectors Oil Refiners ETF CRAK (up 5.6%) that use crude as an input.  Some high-yield corporate bond ETFs like iShares iBoxx $ High Yield Corporate Bond ETF HYG will also gain if oil prices recover as there would be reduced chances of energy companies’ default.

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Energy Select Sector SPDR ETF (XLE): ETF Research Reports
 
iShares iBoxx $ High Yield Corporate Bond ETF (HYG): ETF Research Reports
 
United States Oil ETF (USO): ETF Research Reports
 
iShares U.S. Energy ETF (IYE): ETF Research Reports
 
United States Brent Oil ETF (BNO): ETF Research Reports
 
Vanguard Energy ETF (VDE): ETF Research Reports
 
VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports
 
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Zacks Investment Research
 
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