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How to Play Oil's Surge with ETFs

Neena Mishra
Northern Trust (NTRS) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

 

Oil prices surged to their highest levels since 2014 amid increasing demand, rising geopolitical risks and concerns that Trump administration could withdraw from the Iran nuclear deal.

The US has to decide about its position on the deal by May 12. Breakdown of the 3-year old nuclear agreement with Iran could lead to re-imposition of sanctions on the country and further spike in oil prices.

Iran has the fourth largest oil reserves in the world. In the past, sanctions had curbed Iranian oil exports significantly.

OPEC production cuts put in place about 18 months back to support falling oil prices are also working as inventories have come down and prices have been increasing.

Demand for oil has also been rising thanks to global synchronized growth. Additionally, rising geopolitical risks in the Middle East have boosted oil prices.

ETFs/ETNs that bet on oil prices using futures contracts are good at tracking the commodity in the shorter-term but could perform much worse than the commodity in the longer-term due to contango issues.

Investors need to understand the role of roll yield in the performance of ETFs that hold futures. The oil futures curve is currently in backwardation, resulting in a positive roll yield.

The most popular oil ETFs—the United States Oil Fund (USO), the PowerShares DB Oil Fund (DBO) and United States 12 Month Oil Fund (USL) use different futures strategies to track oil prices.

To learn more about the oil futures curve and these ETFs, please watch the short video above.

Investors should also remember than these ETFs are structured as commodity pools so they will receive K-1 for taxes.

Please see Top Performing Energy ETFs of 2018 if you are a longer-term investor.

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US-OIL FUND LP (USO): ETF Research Reports
 
PWRSH-DB OIL FD (DBO): ETF Research Reports
 
US-12 MONTH OIL (USL): ETF Research Reports
 
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