Producer Cuts in 2019 Could Bolster Leveraged Oil ETF
This article was originally published on ETFTrends.com.
Oil production cuts in 2019 could give the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH) a needed boost, especially after an oversupply has put downward pressure on oil prices as of late.
The precipitous drop in oil saw prices drop 40 percent from their 52-week highs at the start of October. U.S. West Texas Intermediate crude fell 11 percent last week, which represented its worst performance in three years. The drop in prices have certainly benefitted Direxion Daily S&P Oil & Gas Exploration & Production Br 3X ETF (DRIP) , which gained 14 percent today and 140 percent in just the past month.
"Oil ministers are already taking to the airwaves with a 'price stability at all cost' mantra," said Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore.
The drop could also be related to the weakness in the broad market with the Dow Jones Industrial Average plunging over 600 points on Monday.
"I think what we're seeing in oil is a big, big concern for 2019 about a recession. I think that is really weighing heavily on this market," said Helima Croft, global head of commodity strategy at RBC Capital Markets.
However, energy information provider Argus Media, says producer cuts will eventually help level oil prices again as 2019 wears on.
OPEC Agrees to Production Cut
Earlier this month, lengthy Organization of the Petroleum Exporting Countries (OPEC) discussions finally came to a conclusion, resulting in a larger-than-expected production cut. OPEC and associated partners agreed to cut 1.2 million barrels per day with OPEC being responsible for 800,000 barrels.
The latest production cut came as a surprise to many oil analysts as initial estimates were slated at 1 million barrels per day and 650,000 barrels per day for OPEC. Russia, though a non-OPEC member, has emerged as a major player in the negotiations, particularly when discussions got tense between rivals Saudi Arabia and Iran.
Oil producers will utilize output levels from October as the baseline level for cuts while the final deal will be reviewed in April. Final numbers are still under discussion, but according to a delegate familiar with the deal, Russia proposed a 2 percent reduction using that October output level as the baseline metric--the cut would then be equivalent to 228,000 barrels per day, which exceeds the initial cuts of 150,000 barrels per day.
Since 2016, OPEC's negotiation landscape has changed dramatically with Russia and Saudi Arabia putting aside their differences and now, together, exerting their influence over production discussions.
Related: Oil’s Slide Plagues This ETF
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