Crude oil prices have somewhat stabilized after languishing in response to the sudden influx in supply. However, with the Organization of Petroleum Exporting Countries now setting a production ceiling, oil-related exchange traded funds may find themselves on better footing.
ETF Trends publisher Tom Lydon spoke with John Love, President & CEO of USCF, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk the recovery in crude oil prices.
“We’ve just come off of three years of banner headlines,” Love said. “We hit last year, just about the all-time highs and storage in the U.S. and globally – 512 million barrels in the U.S., 3.1 billion barrels globally – and we’ve come off of that but only about 5% with the seasonal adjustment in there, so it’s really not all that impressive.”
Crude oil prices are still a shadow of what they one were, which leaves a lot of upside potential. Now, with the oil cartel stepping into stabilize prices, crude oil may have room to run.
“The announcements from OPEC over the last couple of weeks; the concerted effort to show the market that this deal that they struck in November,” Love said. “They’re really behind. They really think they’re going to hit their numbers, and they really believe that they’re going to pull this off.”
However, as the markets shift to the new paradigm, we may continue to experience bouts of volatility along the way before seeing prices continue to improve toward the later half of the year.
“We’ve got the Saudi announcements that are propping up the market right now,” Love said. “The number is going to start coming and, and as we get into spring, will really get the real numbers with adjustments
ETF investors can access the energy market through a number of options to tactically or strategically position their investment portfolios.
For targeted market exposure, the United States Oil Fund (NYSEArca: USO) tracks West Texas Intermediate crude oil futures and the United States Brent Oil Fund (NYSEArca: BNO) tracks Brent crude oil futures. The United States Natural Gas Fund (NYSEArca: UNG) allows investors track the price movements of the natural gas market.
Additionally, investors can also gain broad commodities market exposure through something like the United States Commodity Index Fund (NYSEArca: USCI).
Potential investors, though, should be aware of the risks in investing in the futures market, notably the effects of contango and backwardation. USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backwardated contracts and then the seven highest-returning contracts.