Guide To Leveraged Oil ETFs

Oil remained the hottest commodity of 2016 with volatile trading seen throughout the year. Sentiments have now turned extremely bullish on the commodity especially after the Organization of the Petroleum Exporting Countries (OPEC) reached a historic deal yesterday to cap its oil production for the first time in eight years, at a meeting in Vienna.

The commodity jumped more than 10%, marking the largest one-day gain since August 2012, and smashed trading volume records. Brent soared to $52 per barrel while U.S. crude climbed to near $50 per barrel.  

The Deal: A Big Game Changer

The 14-member cartel, which accounts for one-third of the global output, will reduce production by 1.2 million barrels per day from the current 33.6 million barrels for six months starting in January 2017. Saudi Arabia, the largest oil producer, will bear the brunt the most with a cut of almost 500,000 barrels per day. The second largest producer – Iraq – which had previously resisted cuts, agreed to curtail production by 200,000 barrels per day. This was followed by output reductions of 139,000 barrels per day for United Arab Emirates, 131,000 barrels per day for Kuwait and 95,000 barrels per day for Venezuela.

Smaller OPEC countries also joined the league of lower production except Iran, which is allowed to boost production to 3.8 million barrels per day, slightly above its October level. Libya and Nigeria were exempted from the deal as they are already suffering from weak production due to unrest and violence. Meanwhile, non-OPEC member Russia, which is currently pumping at record levels, also decided to forego 300,000 barrels per day of oil output to prop up oil price.

As per the International Energy Agency (IEA), the oil market will regain its balance and shift from surplus to deficit very quickly in 2017, if the deal is implemented. It would then end the two-year crude-oil rout and stabilize the oil market. It will revitalize growth in the battered energy sector and lift the economies of oil-rich countries like Russia and Saudi Arabia.

The deal would end the two-year crude-oil rout and stabilize the oil market. It will revitalize growth in the battered energy sector and lift the economies of the oil-rich countries like Russia and Saudi Arabia.

Improving Industry Trends

While OPEC and some non-OPEC production is now expected to decline starting January, U.S. production has been on decline over the past few months. The U.S. Energy Information Administration (EIA) expects oil production to fall from 9.4 million barrels per day in 2015 to 8.8 million barrels per day in 2016 and 8.7 million barrels per day in 2017. In particular, oil production from the seven shale regions – Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica – would likely drop by 20,000 barrels a day in December to 4.498 million barrels a day, the lowest level since April 2014.

Additionally, the latest inventory storage report from EIA has added to the bullish oil outlook. The data showed that U.S. crude stockpiles unexpectedly fell by 884,000 million barrels in the week (ending November 25) compared to analysts’ expectation of an increase of 636,000 barrels. Total inventory was 488.1 million barrels, which is near the upper level of the average range for this time of year.

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