Oil prices are moving higher after OPEC said it would cut its production. This follows tweets from President Donald Trump regarding Iran, stating, that any further threats from Iran will lead to “the official end to Iran.” The moves are creating a stir in some of the energy ETFs.
— Lou Dobbs (@LouDobbs) May 19, 2019
Analysts have varying opinions regarding the best place for investors to put their money to work.
Mary Ann Bartels, of Bank of America explains on CNBC, “Looking at the oil market, it’s balanced. But when we go out and look at the December options market on Brent crude, they’re only pricing in a 10% chance that you can get a move to $90. So we don’t think any conflict is actually priced in to the market.”
“You could go to $90 in a real conflict,” Bartels added.
While investing in an oil ETF is one way to participate in the oil market fluctuations, the inherent nature of futures contracts, which the ETF uses as a primary vehicle, can have some issues, as Dave Nadig of ETF.com explains.
“Well right now it’s not such a big problem,” Nadig said. “The implied annual cost of that roll is about 3%, which is about as low as you can get without going all the way into backwardation. There is a fund that solves this problem, which is DBO, which does a mixture of contracts to try and minimize the damage that contango can do.”
The Invesco DB Oil Fund (DBO) seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return™ (DBIQ Opt Yield Crude Oil Index ER) plus the interest income from the Fund’s holdings of primarily US Treasury securities and money market income less the Fund’s expenses. The Fund is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on light sweet crude oil (WTI).
“It does work,” Nadig explains, regarding DBO. “If you look over the last three years, when we had some periods of really strong contango, it beats the pants off any front month strategy.”
Meanwhile, Bartels explained why she likes the Energy Select Sector SPDR (XLE): “Well, it’s well-diversified, and we do have a model, and we look at how our analysts are rating their stocks, we look at technicals, we look at the uh, efficiency of the fund, and when we combine it all together, that actually scores the highest in our models, so we like the XLE.”
“You really have to be in energy if you want to take advantage of these types of geopolitical moves,” added Nadig.
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