Pain Or Gain Ahead For Oil & Energy ETFs?

Things have been topsy-turvy in the oil patch. Oil slumped into bear market this week as U.S. crude stockpiles hit the highest level since 1990, raising concerns of a supply glut especially amid tariff wars and expected global growth slowdown.

U.S. crude production also set a record, while imports climbed. However, the liquid commodity recoiled on Jun 6 thanks to a report that Washington could defer trade tariffs on Mexico and cues of extension of output cut by OPEC and other producers.

Against this backdrop, investors would be interested in knowing the course of oil in the coming days. United States Oil Fund, LP USO is up 14.5% this year while it has slumped 13.1% in the past month. United States Brent Oil Fund, LP BNO is off 9.2% in a month and has gained 18.3% this year.

Will Brent be at $70/barrel?

A Wall Street Journal survey of 10 investment banks finds an average Brent forecast of $70 per barrel for the year, per oilprice.com. Brent is now in the low $60s, so major analysts are largely brushing aside the current dive and believe that crude will turn around eventually. The drivers of the future oil rally would be “tightening supply conditions due to declines in Venezuela, Iran, potentially Libya and temporary outages from Russia.”

 Investors should note that,in early 2019, the Trump administration imposed sweeping sanctions against Venezuelan state-owned oil firm Petróleos de Venezuela, S.A. PDVSA makes up nearly all of Venezuela’s exports. And U.S. sanctions came in response to the re-election of socialist President Nicolas Maduro, a vote broadly viewed as sham. The United States also recently intensified its efforts by targeting the Venezuela’s petrochemicals industry (read: Oil Jumps: 4 ETFs to Benefit & 4 to Suffer).

Added to this, the almost year-long U.S.-Iran tensions worsened in late April as Washington has announced that it won’t renew waivers previously granted on Iran oil import sanctions. Apart from these, output cut from the OPEC and non-OPEC allies is in place. The market is also waiting for a decision from  OPEC and other producers if they could prolong the cuts and shore up prices (read: Energy ETFs Rallying on Gulf Crisis: 5 High-Yielding Winners).

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