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What Lies Ahead for Oil ETFs?

After registering the best month of this year in July, oil prices slid at the start of August. The U.S. benchmark for crude oil crossed the $50-a-barrel mark to trade at a two-month high at July end, only to fall back to below the $49 level this month (read: Top ETF Stories of July 2017).

WTI fund United States Oil USO added about 6.9% while United States Brent Oil BNO advanced about 6.3% in July on easing concerns over supply glut. Saudi Arabia’s possibility to cut exports by a further 1 million barrels also lifted investors’ spirits last month. But both oil ETFs slipped about 1.9% and 1.7%, respectively, on August 1. In fact, WTI fund lost about 1% after hours.

What’s Behind the Latest Slump?

The beginning of the year was all about rising shale output which clouded the success of the ongoing OPEC output cut deal. But the second half of the year is telling a different story. As per reports, OPEC's output increased last month despite the bloc's agreement to cut production.

As per CNBC, a survey conducted by Bloomberg News revealed that OPEC's July output rose by 210,000 barrels a day while market-monitoring firm Petro-Logistics indicated that output increased 145,000 barrels a day last month.

A Reuters’ survey implied a rise of 90,000 barrels a day from OPEC members. Iraq has lacked on compliance the most so far, with output averaging 69,000 bpd over its quota between January and June, according to the S&P Global Platts OPEC survey. Plus, rising production from Libya and Nigeria – so far barred from the output freeze deal – has added to OPEC supply glut.

If this was not enough, the American Petroleum Institute (API) indicated that U.S. crude inventory increased by 1.8 million barrels in the week ending July 28 to 488.8 million, crumbling all enthusiasm gained from the recent inventory draws in the U.S. market.

What’s Ahead for Oil?

According to energy consultancy Douglas Westwood, the starting up of fields authorized prior to the downturn will likely bring about oversupply substantially in 2018. The agency expects oversupply to continue at least till 2021.

If we go by other analysts’ view, we will end up seeing that the latest oil rally is likely to lose momentum. Though most producers are trying to lower output, the market is still flooded with unsold crude.  

As per Financial Times, Russia – alleged to have never obeyed its promised quota, may increase output and revenue ahead of next year’s presidential election and cash in on fast revenue gain.

Chances of Any Improvement?

On a positive note, Saudi Arabia and Russia are slated to hold a meeting next week to discuss the compliance of the output freeze deal. Nigeria may be asked to join the deal by freezing or even cutting its output from 1.8 million bpd, once it stabilizes at that level from 1.7 million bpd recently, as per CNBC.

On the other hand, U.S. producers are planning less capital investments in the oil patch. So, a concerted global effort to shore up oil prices may provide some support to oil ETFs, though a steady uptrend is unlikely (read: Capex Cuts Are Back: What's in Store for Energy ETFs?).

On the demand side, International Energy Agency (IEA) has offered an optimistic outlook. After feeble 1.0 mb/d growth in 1Q17, there was a substantial improvement in 2Q17 to 1.5 mb/d. For 2017, demand is projected to touch 98.0 mb/d, up from the previous estimate. Further growth of 1.4 mb/d is predicted for 2018, with global demand reaching 99.4 mb/d.

A stable demand profile should give another round of support to the commodity.  Also, chances of U.S. sanctions against Venezuela's oil sector after its president was alleged of dictatorship, might give the commodity a boost.

ETFs in Focus

Given this, the following oil ETFs could be on investors’ radar (see all energy ETFs here).

iPath S&P GSCI Crude Oil TR ETN OIL – Down 3% on August 1

ProShares Ultra Bloomberg Crude Oil UCO – Down 4% on August 1

PowerShares DB Oil ETF DBO – Down 1.5% on August 1

VelocityShares 3x Long Crude Oil ETN UWT – Down 5.9% on August 1

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US-OIL FUND LP (USO): ETF Research Reports
 
PWRSH-DB OIL FD (DBO): ETF Research Reports
 
OIL INDEX (UA) (OIL): ETF Research Reports
 
US BRENT OIL FD (BNO): ETF Research Reports
 
PRO-ULT BB CRUD (UCO): ETF Research Reports
 
VS-3X LG CR OIL (UWT): ETF Research Reports
 
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