- Oil prices and commodity-related ETFs have been strengthening
- Energy prices continued to gain ground after the International Energy Agency (IEA) said were past the bottom
- IEA warns of continued volatility ahead, especially with demand slowing down
Oil prices and commodity-related exchange traded funds have been strengthening as traders bet that producers are cutting back after a period of low energy prices. However, investors should not grow too complacent.
Over the past month, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, rose 26.1% while the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, gained 27.2%.
WTI crude oil futures were 2.0% higher Friday to $38.6 per barrel, and Brent oil futures were up 0.9% to $40.4 per barrel.
Energy prices continued to gain ground after the International Energy Agency said were past the bottom.
“There are signs that prices might have bottomed out,” the IEA said, reports Holly Ellyatt for CNBC. “For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance.”
However, IEA warned of continued volatility ahead, especially with demand slowing down.
“Without an increase in demand expectations, high-cost oil suppliers will continue to bear the brunt of the market-clearing process,” the IEA added.
The agency projected global oil demand growth for 1.2 million barrels per day in 2016 but cited a “sharp deceleration in demand growth in the three months to March, particularly in the US and China.”
Consequently, oil traders will have to monitor the Organization of Petroleum Exporting Countries to gauge the supply side. OPEC has hinted at its desire to limit production in face of the prolonged low oil environment. However, Iran, which has just recently re-entered the global oil market, is only just starting to ramp up production, potentially putting a damper on plans for a OPEC cut.
The IEA calculated that global production stood 1.8 million barrels per day more year-over-year “as a slight decline in non-OPEC was more than offset by OPEC gains.”
While oil prices have recovered in recent weeks, this should not “be taken as a definitive sign that the worst is necessarily over,” the IEA warned.
Consequently, oil traders who have enjoyed the recent run up but are wary of further volatility ahead may take a look at a number of inverse ETFs to hedge their bets. For instance, the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil. The DB Crude Oil Double Short ETN (NYSEArca: DTO) also follows a -200% performance of oil. Lastly, the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil.