Oil ETFs In Focus On Oil Output Freeze Talks

Includes: BNO, DBO, OIL, USO
by: Zacks Funds

Oil has been the most talked-about commodity over the past one-and-a-half years, with wild swings in its prices. Last month, oil price slipped to a level not seen in more than 12 years, thanks to growing supply and falling global demand. In fact, the commodity has plunged about 70% since the summer of 2014.

This is because oil production has risen worldwide with the Organization of the Petroleum Exporting Countries (OPEC) continuing to pump at near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, a strong U.S. dollar backed by a rate hike has made dollar-denominated assets more expensive for foreign investors and has thus dampened the appeal for oil. On the other hand, demand for oil across the globe has been falling given slower growth in most developed and developing economies. In particular, persistent weakness in the world's biggest consumer of energy - China - will continue to weigh on the demand outlook.

In order to stabilize the oil market, the biggest oil producing countries - Saudi Arabia and Russia - along with Qatar, Venezuela, UAE and Kuwait have stepped in and agreed to freeze oil output at the January level, provided the other countries join the initiative. The move is the first deal between OPEC and non-OPEC producers in 15 years, but might fall apart as Iran has been trying to boost production after the sanctions were lifted last month.

As per the Iranian newspaper, Shargh, Iran's OPEC envoy said that it is "illogical" for the country to join the oil output freeze deal. This is especially true as the country was producing at least 1 million barrels per day below its capacity and pre-sanction levels since 2011. Meanwhile, the other countries increased their production during the same period and are now hovering around record levels. However, Iran might be offered special terms as part of the deal according to Reuters.

Even if the deal is cut and global producers freeze oil output at January levels, the world will still have about 300 million excess barrels per year than needed. Thus, it would be difficult to rebalance the oil market. However, it will undoubtedly infuse some confidence and might reduce the supply glut later in the year. Further, a renewed optimism to restore growth in China, Europe and Japan could drive oil demand in the coming months.

Market Impact

The potential deal initially sparked a rally in oil price on Tuesday with Brent crude rising as much as $35.55 per barrel. But the gains were pared after Iran's prospects of joining the deal started looking dull. Notably, Brent crude is trading around $33 per barrel while U.S. crude is hovering below $30 per barrel at the time of writing.

This has put oil ETFs in focus for the coming days. These ETFs might be easier plays for investors seeking to deal directly in the futures market. Below, we have highlighted a few popular oil ETFs that could be interesting plays in the coming days, given the volatile trading in oil.

United States Brent Oil ETF (NYSEARCA:BNO)

This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $93.9 million in its asset base and trades in a good volume of roughly 206,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO lost 1.6% in Tuesday's trading session.

United States Oil ETF (NYSEARCA:USO)

This is the most popular and liquid ETF in the oil space with AUM of over $3.1 billion and average daily volume of around 38.4 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). The ETF has 0.45% in expense ratio and lost 0.2% on the day.

iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)

This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $625.3 million in AUM and trades in solid volume of roughly 4.4 million shares a day. Expense ratio came in at 0.75% and the note was up 1.3% on the day.


This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of more than 830,000 shares and AUM of $419.3 million. It charges an expense ratio of 78 bps and lost 1.8% in Tuesday's trading session.

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