Oil's Recent Sell-Off Could Put Invesco's 'DBO' in an Area of Value

Oil’s recent sell-off may have just been a temporary setback for bullish traders and investors riding out the ebbs and flows of the commodity. At its current level, oil could be in an area of value and primed for opportunity with the Invesco DB Oil Fund (DBO).

“Oil came back from a sell-off that investment banks from Goldman Sachs to Morgan Stanley said was excessive and offered an opportunity to buy, with physical crude markets still showing signs of strength in the long run,” a Rigzone article said. “Futures in New York rose 2.4% on Friday, after a plunge of more than 7% in the previous session. While the market may have gotten too long for its own good, the recent price weakness is likely temporary as signs remain that demand is set to recover and supplies will tighten.”

“What happened yesterday is not indicative of overly soft physical markets,” said Michael Tran, an analyst at RBC Capital Markets. “The market was getting pretty stretched, so given the general headlines of China slowing to some degree, Covid returning in Europe and demand maybe not being as robust as people had thought, these are all just convenient opportunities for the market to rebase, retrench and reload heading into the summer.”

DBO seeks to track the DBIQ Optimum Yield Crude Oil Index Excess Return (DBIQ-OY CL ER), which is intended to reflect the changes in market value of crude oil. The single index Commodity consists of Light, Sweet Crude Oil (WTI). The fund invests in futures contracts in an attempt to track its corresponding index.

In the meantime, despite the recent sell-off pressure, DBO is still up almost 30%. In its one-year chart, DBO is up 87%, a strong recovery after 2020 saw the commodity fall below $0.

DBO Chart

Could DBO Hedge Against Inflation?

There’s a lot talk right now regarding inflation and whether the Fed will raise rates sooner than anticipated. DBO can actually be used a a tool to hedge against inflation.

“Commodity exposure in a portfolio used to be a binary choice, either one invested in them, or they did not,” an ETF Database analysis suggested. “Now, commodities have been proven as powerful inflation hedging tools with the power to generate powerful returns for an individual portfolio.”

“This fund is based on futures-contracts to makes it subject to the risks of contango, backwardation, and other problems that are associated with futures-backed products,” the analysis said further. “Despite setbacks, this product can be a powerful tool if the investor fully understand the complexities of the ETF and how to trade it.”

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