Crude oil and related exchange traded funds may gain momentum as a recovering global economy, rising inflationary pressures and efforts to cut down the global supply glut may help support the market.
“The expected global economic backdrop remains broadly supportive for the energy sector in coming years. Demand for oil remains robust driven by further recovery of global growth accompanied with building inflationary pressures, while efforts to reduce the global supply glut are underway,” Maxwell Gold, Director of Investment Strategy for ETF Securities, said in a research note. “These changes in supply side fundamentals are beginning to unravel and impact some of the traditional drivers of energy returns including the US dollar (USD), interest rates, and curve structure.”
For instance, the negative correlation between the U.S. dollar and energy prices are beginning to unravel as the U.S. grows more energy self-sufficient through increased shale-oil production. The USD is now behaving more like traditional commodity currencies.
The negative effects of contango in the oil futures market are diminishing and may even move toward backwardation. Maxwell argued that the degree of contango has been reduced ever since oil prices bottomed out in 2016. If the global supply is cut at a higher rate and oil inventories continue to see drawdowns, the market may move further into backwardation and bring the roll yield back into focus as a contributor to oil and energy returns.
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, Maxwell added.
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 information on the crude oil market, visit our oil category.