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Two Ways to Tap Rising Oil Prices with ETFs

Oil has grabbed investors’ attention again this month as the commodity is on track for the longest monthly rally  in more than five years. The commodity has risen about 8% in May, representing the fourth consecutive month of gains. Notably, oil price has jumped more than 80% over the past three months from the February lows of $27 per barrel (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners).

The impressive gain came on the back of improving demand/supply dynamics, which are rebuilding investors’ lost confidence in the rebalancing of the oil market. This is especially true as global surplus is easing with declining production from various corners of the world such as U.S., China, Canada, Venezuala and Nigeria. Additionally, expectation for lower supply in the coming months remains intact despite increasing production from Iran and Saudi Arabia. On the other hand, global demand is on the rise and the U.S. summer driving season would provide an additional boost.

In this regard, the U.S. Energy Information Administration (EIA) expects oil production from the seven shale regions – Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica – to fall by 113,000 barrels a day from May to 4.96 million barrels a day in June. The agency also predicts global demand to grow on higher Chinese and Indian consumption. It expects demand to rise 1.4 million barrels per day for this year and 1.5 million barrels per day for the next compared to the earlier projections of 0.3 million barrels per day and 0.2 million barrels per day, respectively.

Further, Goldman GS, one of the most bearish forecasters, recently turned bullish on the commodity, injecting optimism into the oil market. Goldman raised the price target for crude oil to $45 per barrel for the second quarter and $50 per barrel for the second half of the year from $35 per barrel and $45 per barrel, respectively, predicted in March. Other analysts and forecasters also had a bullish stance on the commodity.

The UAE economy minister Sultan Bin Saeed Al Mansoori sees oil jumping to $60 per barrel this summer. The global chief economist at Standard Chartered Plc expects WTI and Brent to rise above $60 before the end of the year, and SEB Bank to also see oil prices above $60 in 2016 (read: Oil Rally Likely to Continue: ETFs & Stocks to Watch).

How to Play?

Given the recovering fundamentals, investors have turned bullish on oil and are seeking to tap this opportunity. For them, a leveraged play on oil could be an excellent idea as these could lead to huge gains in a very short timeframe when compared to the simple products. Below, we highlight a couple of products that could garner huge profits from the rising oil price in a short span:

ProShares Ultra Bloomberg Crude Oil ETF UCO

This fund provides a leveraged play in the crude oil segment of the commodities market. It seeks to deliver twice the return of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $930.7 million in AUM and trades in solid volume of about 13.5 million shares a day on average. Expense ratio comes in at 0.95%. The ETF gained 11.4% in May.  

VelocityShares 3x Long Crude Oil ETN UWTI

This is another popular leveraged fund targeting the energy segment of the commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has attracted over $1 billion in its asset base. Though the fund charges a higher fee of 1.35% per year, its average daily volume is incredible, exchanging about 13.5 million shares a day. UWTI surged 16.8% in May.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (see: all Leveraged Commodity ETFs here).

Still, for ETF investors who are bullish on the commodity for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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GOLDMAN SACHS (GS): Free Stock Analysis Report
PRO-ULT BB CRUD (UCO): ETF Research Reports
VEL-3X LNG CRD (UWTI): ETF Research Reports
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