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ETFs at Risk as Oil Sees Worst Quarter on Record

Oil prices hit a rough patch in the first three months of 2020, tackling dual blows of supply and demand. The U.S. West Texas Intermediate crude prices declined more than 54% in March and 66.5% in the quarter. The Brent crude lost 55% last month. It also saw the worst quarterly decline of 65.6% in the March quarter since June 1988.

However, President Trump’s tweets stating that he expects Saudi Arabia and Russia to reach an agreement for a production cut by 10 to 15 million barrels per day had sent oil rallying around 25% on Apr 2.

Let’s take a closer look at the factors that have been affecting the oil market.

Coronavirus Leads to Waning Demand

The United States has recorded more than 245,500 cases, with a death toll of more than 6,000. Globally, the number of infected cases has risen to more than 1,026,000. The outbreak has disrupted global supply chains and economic activities. Moreover, analysts are increasingly speculating a global recession. The rapid spread of the virus is leading to sweeping travel bans, cancelation of large events and conferences, and shrinking factory activities. The airlines industry is believed to be the worst-affected sector by the outbreak and therefore, is leading to a slump in fuel demand as well. In fact, global rating agency Morgan Stanley had estimated the coronavirus pandemic  to result in a deep recession in the world economy in the first half of 2020 along with a 2.3% deceleration in growth.

Analyzing the current gloomy scenario, Rystad Energy’s analyst has said, “this is the most dismal oil demand picture we have witnessed in a long time with a simultaneous collapse in jet fuel, gasoline, shipping fuel, petrochemicals, and oil used for power generation.” In April, the global oil demand is expected to decline by 30 million barrels a day (read: ETFs at Risk as Oil Slides to 13-Month Low on Covid-19 Scares).

Oil Price War

Russia did not agree with Saudi Arabia’s proposed plan to cut production to manage the impact of coronavirus. As a result, Saudi Arabia took a surprising decision to increase crude output starting April, probably more than 10 million barrels a day. Saudi Arabia also cut its export prices to encourage more buying by refiners. This will definitely trigger a price war in the oil market. Notably, the output cut program expired at the end of March, meaning OPEC+ can produce as much oil as it wants to, beginning Apr 1. In this regard, Bank of America has noted, “the oil market is about to flood with surplus barrels” (read: Bull & Bear Tug of War for Oil: ETFs in Focus).

Looking Forward

Doubts over Trump’s tweets on supply cuts from producers like Saudi Arabia and Russia are arising. Saudi Arabia has called for an emergency meeting of the OPEC+ alliance, which includes Russia, to discuss a fair agreement. It will be worth watching whether Saudi Arabia will agree on an output cut even if the United States doesn’t agree on reducing crude oil production. Also, it is being speculated whether curbing the output will help stabilize the oil markets at a time when coronavirus is hurting demand.

Oil ETFs That Might Lose

Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).

United States Oil Fund USO

The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: ETF Areas That Gained Investors Favor in Virus-Infected March).

AUM: $2.51 billion

Expense Ratio: 0.73%

Invesco DB Oil Fund DBO

The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: ETFs at Risk as Oil Slips to 18-Year Low on Coronavirus Crisis).

AUM: $282.8 million

Expense Ratio: 0.78%

United States Brent Oil Fund BNO

The fund tracks the daily price movement of Brent crude oil.

AUM: $116.8 million

Expense Ratio: 0.90%

United States 12 Month Oil Fund USL

The fund replicates with possible accuracy the movement of West Texas Intermediate light, sweet crude oil.

AUM: $51.3 million

Expense Ratio: 0.82%

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Invesco DB Oil ETF (DBO): ETF Research Reports
 
United States 12 Month Oil ETF (USL): ETF Research Reports
 
United States Oil ETF (USO): ETF Research Reports
 
United States Brent Oil ETF (BNO): ETF Research Reports
 
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Zacks Investment Research
 
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