Among oil exchange traded products, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, usually commands the most headlines. However, traders willing to bet on a rebound in crude prices may want to acknowledge the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
“In a sign that investors are more optimistic on a rise in Brent prices, data show that hedge fund managers lowered their net long position on WTI by 2 percent to 274,441 futures and options in the week that ended on August 15, according to data by the U.S. Commodity Futures Trading Commission quoted by Bloomberg,” reports OilPrice.com.
Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
There are other reasons to consider BNO and Brent at the moment.
“What’s more, the Brent futures curve has now flipped into backwardation for the first time in years, suggesting that the oil market is tightening and going toward re-balancing,” reports OilPrice.com. “The WTI futures curve is still in a state of contango–the opposite of backwardation.”
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Widening contango could eat away at long-term returns. Specifically, USO tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance.
Investors interested in gaining exposure to the crude oil market can take a look at the recently launched ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF). BEF tries to provide long-term capital appreciation designed to exceed the performance of the Bloomberg Energy Index 3 Month Forward Index, which tracks movements in the prices of rolling positions in a basket of energy commodity futures with a maturity between 4 and 6 months.
For more news on oil ETFs, visit our oil category.