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Oil ETFs Amid Tug of War Between OPEC Deal & Trade Tensions

Sanghamitra Saha

Oil prices have been seesawing of late thanks to chances of a protracted output cut deal by Saudi-led OPEC and Russia and U.S.-China trade war. United States Oil Fund LP USO is up only 1% in the past five days (as of Jun 10, 2019).

Oil slumped into the bear market in early June as U.S. crude stockpiles hit the maximum since 1990, raising concerns of a supply glut especially amid tariff wars and expected global growth slowdown (read: Pain or Gain Ahead for Oil & Energy ETFs?).

Will There Be Another Output Cut Deal After June?

Crude is now hovering around $53.88/barrel. Saudi Arabia is now hurrying to extend the ongoing production cuts, which are due to expire in June. But there is still uncertainty regarding Russia’s decision on whether to continue production curbs.

According to an article published on oilprice.com, “of course Saudi Arabia wants oil prices to remain higher,” the Interfax news agency quoted Putin as saying. “But we have no such need due to the more diversified nature of the Russian economy.” Moscow is considering if further cuts would help the United States to take Russian market share, per CNBC.

Trade Tensions Rife

U.S.-China trade tension is a key concern. The Trump administration lifted tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10 and China imposed a tariff hike on $60 billion of American goods to 25% starting Jun 1.

All these trade conflicts will nothing but slow down global growth. Per IMF, “the current and threatened U.S.-China tariffs could cut 2020 global gross domestic product by 0.5%.” So, the fate of oil price largely depends on the future of trade war.

Barclays bank noted that over the past week or so, economists had lowered their GDP growth outlook for the United States, China, India and Brazil — countries that make up more than three-quarters of their oil demand growth assumptions for this year, as quoted on CNBC.  The revisions suggest a reduction of 300,000 barrel per day in their present "global oil demand outlook of 1.3 million barrels per day year-on-year for this year."

Expect Volatility in the Oil Patch

Having said all, we would like to note that Russian energy minister Alexander Novak acknowledged the risk of oversupply. He could not rule out a drop in oil prices to $30 per barrel if the extension of the output cut deal is not executed.

Investors should note that the United States and China will also hold a discussion in the G20 meeting slated for later this month in Japan. And the joint OPEC+ meeting is scheduled in early July. Investors would get a clearer view of the flow of oil price after these two events. Till then one can expect oil prices to remain volatile.

ETFs in Focus

Against this backdrop, investors should keep a close eye on oil ETFs like USO and BNO and broader energy ETFs like Energy Select Sector SPDR Fund XLE, Vanguard Energy ETF VDE, SPDR S&P Oil & Gas Exploration & Production ETF XOP and so on.

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United States Brent Oil Fund LP (BNO): ETF Research Reports
SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
US Commodity Funds United States Oil Fund (USO): ETF Research Reports
Vanguard Energy ETF (VDE): ETF Research Reports
Energy Select Sector SPDR Fund (XLE): ETF Research Reports
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