ETFs To Tap Oil Price Strength

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Oil has been surging in recent months on tightening supply conditions and the prospect of higher demand. Both benchmarks reached a 10-month high with more upside potential left.

Investors seeking to tap the strength in oil prices may bet on the ETFs that are directly linked to the futures contracts. United States Oil FundUnited States Brent Oil FundInvesco DB Oil Fund and United States 12 Month Oil Fund are popular oil ETFs that could be interesting plays to directly deal with in the futures market in the coming months.

The global oil market is expected to face the biggest deficit in over a decade. According to the latest data published by Organization of Petroleum Exporting Countries (OPEC), the industry will likely face a supply shortfall of more than 3 million barrels a day next quarter. The shortage comes as the two major oil-producing nations, Saudi Arabia and Russia, extended their voluntary cuts by the end of the year.

Saudi Arabia has extended its voluntary oil output cut of 1 million barrels per day (bpd) for another three months until the end of December 2023. Russia extended its oil export cuts by 300,000 bpd until the year-end. Meanwhile, world oil inventories, having depleted sharply this quarter, are also set for an even steeper drop of roughly 3.3 million barrels a day in the next three months, per OPEC.

Coming to the demand side, “world oil demand is scaling record highs” said the International Energy Agency in a recent note. Strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity are driving demand higher. Global oil demand is set to expand by 2.2 million bpd to 102.2 million bpd in 2023, with China accounting for more than 70% growth.

Moreover, the oil futures market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts in the oil futures market. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to continue, at least in the near term, acting as the biggest catalyst for the commodity.


United States Oil Fund (USO)

United States Oil Fund is the most popular ETF in the oil space, with an AUM of $1.5 billion and an average daily volume of 3 million shares. It seeks an average daily percentage change in USO’s net asset value, for any period of 30 successive valuation days, within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period.

United States Oil Fund has an expense ratio of 0.60%.


United States Brent Oil Fund (BNO)

United States Brent Oil Fund provides direct exposure to the spot price of Brent crude oil on a daily basis through futures contracts. BNO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts.

United States Brent Oil Fund amassed $169.4 million in its asset base and charges 1.00% as annual fees and expenses. Volume is good as it exchanges 429,000 shares a day on average.


Invesco DB Oil Fund (DBO)

Invesco DB Oil Fund provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The Index is a rules-based index composed of futures contracts on WTI.

Invesco DB Oil Fund has an AUM of $264.9 million and charges 76 bps of annual fees. DBO trades in an average daily volume of 565,000 shares.


United States 12 Month Oil Fund (USL)

United States 12 Month Oil Fund provides investors with exposure to the daily price movements of West Texas Intermediate’s light, sweet crude oil. USL's benchmark is the near-month futures contract to expire and the contracts for the following 11 months for a total of 12 consecutive months. If the near-month futures contract is within two weeks of expiration, the benchmark will be the next-month contract to expire and the contracts for the following 11 months.

United States 12 Month Oil Fund is unpopular and less liquid with an AUM of $77.3 million and an expense ratio of 0.85%. USL trades in an average daily volume of 12,000 shares.

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