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Oil finally bounces -- >>> Positive News Flow Sparks Off Rally in Oil ETFs



Zacks

By Sweta Killa

August 28, 2015



https://finance.yahoo.com/news/positive-news-flow-sparks-off-144002232.html



Thursday’s trading session, representing the biggest one-day rally in over six years, and extending its gains on Friday in early trade. Notably, U.S. crude is on track for its first weekly gain in nine weeks while Brent crude is set for its first weekly gain in two weeks (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides).

The steep increase came as better-than-expected economic data lifted confidence in the world’s largest economy and crude stockpiles unexpectedly fell 5.5 million barrels for the week ending August 21. In particular, the U.S. economy expanded at a much faster rate of 3.7% annually in the second quarter as against 2.3% growth last month. The economy buoyed up on increased investments and higher spending by government, businesses and consumers. This suggests that the economy is on a firmer footing and demand for oil will continue to rise in the future.

A separate report showed that the hard-hit Venezuela has approached the Organization of the Petroleum Exporting Countries to hold an emergency meeting in coordination with Russia for a possible production cut or to discuss the strategies to stop the oil price rout. Additionally, Royal Dutch Shell has declared force majeure on shipments of Nigeria’s Bonny Light crude oil after shutting down two key pipelines. This would cut supplies from Africa’s biggest oil producer as Bonny Light crude oil exports account for over 8% of Nigeria's total planned exports of nearly 2 million barrel per day.

The positive steps propelled the oil price higher. Moreover, the market is anticipating that the recent round of monetary stimulus by the Chinese central bank, to stimulate the economy, will definitely pay off and lead to higher oil demand in China. Further, short covering and bargain hunting added to the strength in the oil price (read: International ETFs Gain the Most from China Rate Cut).

ETF Impact

The tremendous trading in oil sent the oil ETFs space into deep green in yesterday’s trading session. In particular, iPath S&P GSCI Crude Oil Index ETN (OIL), United States Oil Fund (USO), PowerShares DB Oil Fund (DBO) and United States 12 Month Oil Fund (USL) climbed close to double digits on a single trading day.

Below we profile these ETFs and discuss some of the specifics behind their recent jump:

OIL

This is an ETN option for oil investors and delivers returns through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $738.9 million in AUM while charges 75 bps in fees per year. OIL has been the biggest gainer, climbing about 11% on the day and saw trading volume of more than 2.5 times than the normal average daily volume.

USO

This is the most popular and liquid ETF in the oil space with AUM of $1.7 billion that charges 45 bps in fees per year from investors. The fund seeks to match the performance of the spot price of light sweet crude oil WTI. USO surged about 9.2% on Thursday session with elevated volumes of 2.5 times the average daily volume (see: all the energy ETFs here).

DBO

This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund has AUM of $443 million and expense ratio of 0.78%. The ETF was up 8.9% with volume of nearly 1.5 times than normal.

USL

USL provides investors exposure to front-month WTI futures contracts. It is unpopular and less liquid with AUM of $71 million. Expense ratio came in at 0.60%. The fund gained 8.9% on the day with elevated volumes of nearly three times than normal.


Bottom Line


Given the ongoing positive developments and China measures, oil ETFs are expected to buoy up, at least in the near term.

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