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Oil ETFs in Focus as Oil Rallies on Saudi Attacks

Sweta Jaiswal, FRM

Oil prices soared to six-month highs following drone attacks on Saudi Arabia’s crude facilities. The attacks are expected to cut down the world’s largest oil producer’s output by around 50% (read: Saudi Oil Attack: Sector ETF Winners and Losers).

Let’s take a look at the series of events that have taken place:

The Attack

Per BBC, the first drone attack took place at Aramco's largest oil processing plant site, Abqaiq. Khurais oilfield was attacked next. The attacks have been so devastating that Aramco is estimating a 5.7 million barrels per day (bpd) fall in output which is equivalent to more than 5% of global crude supply. It is worth noting that Saudi Arabia exports more than 7 million barrels of crude oil every day, most of which goes to Asia. Per U.S. Energy Information Administration data, Saudi Arabia had produced 9.85 million bpd in August (read: Is an Oil ETF Rally on Middle East Tensions Sustainable?).

However, per initial investigation reports, no casualties have been reported and the fire is under control. Meanwhile, the responsibility for the attacks has been taken by Yemen’s Houthi rebels. Notably, Saudi Arabia and Yemen have been interlocked in a war since 2015 (read: ETFs to Win as Saudi's New Minister May Seek Same Oil Policy).

US Takes Stands

U.S. President Donald Trump has announced authorization to release oil from U.S. strategic reserves on account of lower production from Saudis due to the attacks. He commented that the United States was "locked and loaded" to respond to the attack. The United States has also been considering the possibility of Iran’s involvement in the attacks. This in turn is adding to analysts’ speculations of an increased possibility of a military strike on Tehran.

Looking Forward

Unless Saudi Arabia provides a clear picture on how long will it need to reach the original oil output capacity, it is going to keep adding to worries of instability in oil reserves globally. Moreover, chances of increased unrest due to heightening Middle East tensions might disrupt supplies and lead to a further rise in oil. In this regard, Eurasia group’s practice head for the Middle East and North Africa, Ayham Kamel, has commented, “a small $2-$3 premium would emerge if the damage appears to be an issue that can be resolved quickly, and $10 if the damage to Aramco’s facilities is significant leading to prolonged supply outages.”

Also, global head of market insight at S&P Global Platts, Sarah Cottle, has said that if the conditions remain the same in Saudi Arabia for a longer period of time than oil prices could spurt over $80 a barrel.

Oil ETFs in Focus

This has compelled many investors to take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).

United States Brent Oil Fund BNO

The fund tracks the daily price movements of Brent crude oil (read: Spate of Positive News Boosts Oil ETFs).

AUM: $80.4 million

Expense Ratio: 0.90%

YTD Return: 17.9%

United States Oil Fund USO

The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: ETFs in Focus as Rising Trade War Tensions Hurt Oil Prices).

AUM: $1.38 billion

Expense Ratio: 0.73%

YTD Return: 18.4%

Invesco DB Oil Fund DBO

The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return plus the interest income from the holdings of primarily US Treasury securities and money market income less expenses (read: ETFs to Gain From the Oil Rally on US Crude Inventory Data).

AUM: $$265 million

Expense Ratio: 0.78%

YTD Return: 12.6%

US Commodity Funds United States 12 Month Oil USL

The fund replicates with possible accuracy the movement of West Texas Intermediate light, sweet crude oil.

AUM: $51.2 million

Expense Ratio: 0.82%

YTD Return: 14.1%

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United States Oil Fund, LP (USO): ETF Research Reports
 
United States Brent Oil Fund LP (BNO): ETF Research Reports
 
United States 12 Month Oil Fund, LP (USL): ETF Research Reports
 
Invesco DB Oil Fund (DBO): ETF Research Reports
 
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