Oil-related exchange traded funds are rallying Wednesday after Iran said it could support the discussion among four of the largest oil producers to freeze output in an attempt to halt the plunging energy prices. However, the bounce in energy prices may be short lived.
On Wednesday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, gained 5.7% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, rose 6.3%.
Nymex WTI crude oil futures were up 5.3% to $30.6 per barrel on Wednesday while ICE Brent crude futures were up 6.6% to $34.3 per barrel.
Meanwhile, leveraged oil ETFs also surged. On Monday, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, increased 10.9% and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, jumped 16.6%.
Oil prices continued to strengthen Wednesday after Iranian Oil Minister Bijan Zanganeh said he supported a production “ceiling” to stabilize oil prices, Reuters reports.
“The decision that was taken for the OPEC and non-OPEC members to keep their production ceiling to stabilise the market and prices for the benefit of producers and consumers, is supported by us,” Zangeneh said.
Qatar, Russia, Saudi Arabia and Venezuela have been in discussions to hold output steady at January levels, but only if other producers followed suit.
However, the rebounding oil may not last. Zanganeh has not explicitly stated that Iran would keep its output at January levels. Iran had planned to increase output by at least 500,000 a day this year after the lifting of Western sanctions last month, CNBC reports.
“Asking Iran to freeze its oil production level is illogical … when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices … how can they expect Iran to cooperate now and pay the price?” Iranian OPEC representative Mehdi Asali told Shargh newspaper.
Some observers also question the integrity of the countries as some have been known to deviate from the agreements – Russia failed to respect a similar agreement with OPEC producers in the 1990s.
Moreover, Goldman’s Global Head of Commodities Research Jeff Currie said that the agreement is for a freeze and not a production cut, so oil prices could remain depressed, pointing to a similar situation in 1998 during the Asian financial crisis that resulted in a huge surplus and a relative demand loss, Bloomberg reports.
United States Oil Fund
Max Chen contributed to this article.