As the U.S.-China trade war heightens, oil prices are in unison with the volatility in the capital markets. On Tuesday, Brent crude oil prices went above $70 per barrel due to supply cuts led by producer the Organization of Petroleum Exporting Countries (OPEC) in addition to U.S. sanctions on Iran as well as Venezuela.
In addition, U.S. West Texas Intermediate (WTI) crude futures headed closer to $60. OPEC supply cuts once again weighed in on futures prices as the group and its allies are scheduled to meet on June 25 and 26 to discuss output policy.
“On one side, you have supply concerns – like the United States’ sanctions on Iranian oil, slowdowns in U.S. shale production and contaminated Russian oil – that are trying to pull the price of crude oil higher,” wrote John A. Jagerson of Investopedia. “On the other side, you have demand concerns – like a potential slowdown in the global economy thanks to the trade war between the United States and China – that are trying to push the price of crude oil lower.”
Oil traders can look to ETFs like the United States 3x Oil (NYSEArca: USOU), which seeks the daily changes in percentage terms of its shares’ per share NAV to reflect three times the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the “Benchmark Oil Futures Contract”) less the fund’s expenses.
USCF will endeavor to have the notional value of the fund’s aggregate exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of the fund’s NAV. The Benchmark Oil Futures Contract is the futures contract on light, sweet crude oil as traded on the NYMEX, traded under the trading symbol “CL” (for WTI Crude Oil futures).
As U.S.-China trade talks appear in limbo, investors are turning to bonds for safety while volatility rises as evidenced in exchange-traded products (ETPs) like the VelocityShares Daily 2x VIX Short-Term ETN (NasdaqGM: TVIX).
TVIX was up over 32 percent. Meanwhile, the return of volatility paved the way for investors fleeing to the safety of government bonds as yields fell and prices for Treasury debt went higher.
“The stock market had held an optimistic view towards U.S.-China trade, likely pricing in an end to negotiations. But the sudden resurgence in trade tensions has forced it to grapple with uncertainties, such as the risk of the talks taking an unforeseen turn,” wrote strategists at Goldman Sachs.
TViX seeks to replicate the returns of twice (2x) the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. The ETNs are linked to a multiple (2x) of the daily return of the index and do not represent an investment in the VIX.
In the meantime, traders will also be watching oil prices.
“Supply-side issues returned to the fore, with crude oil prices rising strongly,” ANZ bank said on Tuesday. “Iran exports remain under pressure as U.S. sanctions bite. This comes as OPEC appears to be heading towards extending the current production cut agreement.”
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