Oil ETFs Rebound on Prospects of Production Cuts | ETF Trends

After hitting a 13-year low on expanding stockpiles, crude oil surged Friday. Oil ETFs jumped as traders speculated on potential production cuts out of the Organization of Petroleum Exporting Countries.

On Friday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, gained 5.4% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, rose 5.0%. Year-to-date, USO declined 27.3% and BNO fell 19.1%.

After sliding over the past five sessions, WTI crude oil futures surged 11.1% to $29.1 per barrel on Friday while Brent crude futures jumped 9.2% to $32.8 per barrel.

Meanwhile, leveraged oil ETFs also shot up on the action. On Friday, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, increased 7.8% and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, gained 14.1%.

Oil prices rallied Friday after WTI crude dipped to its lowest settlement since May 6, 2003. Energy prices rebounded after the United Arab Emirates’ energy minister said OPEC members are “ready to cooperate” on cutting output, report Georgi Kantchev and Timothy Puko for the Wall Street Journal.

“Every time someone comes out and says ‘We’re ready to cooperate,’ there’s always a knee-jerk reaction,” to buy, Peter Donovan, broker for Liquidity Energy, told the WSJ. “Prices have come down so far, guys don’t want to get caught [selling]at the bottom.”

Venezuela has proposed that OPEC and non-OPEC members should freeze output at current levels.

“An OPEC cut is still hard to see but this week the notion of an OPEC ‘freeze’ was introduced and we find that easier to envisage,” Olivier Jakob of consultancy Petromatrix told the WSJ.

However, production cuts from the oil cartel are still speculation and may not come to pass. The ongoing supply glut has dragged down oil prices over the past two years and many warn that the market won’t turn around any time soon. U.S. oil inventories remain near their highest level in at least eight decades.

If the OPEC-related posturing does not pan out, inverse or bearish oil ETF bets could be back on the plate. For instance, investors who want to hedge against further weakness can use the simple inverse United States Short Oil (NYSEArca: DNO) and the DB Crude Oil Short ETN (NYSEArca: SZO). For the more aggressive trader, there are number of leveraged options, including the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO), which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (NYSEArca: DTO), which also follows a -200% performance of oil. Lastly, the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil.

United States Oil Fund

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.