ETFs

Crude ETFs Climb as Oil Futures Approach Multi-Year Highs

Crude oil futures and ETFs jumped to multi-year highs on Friday, targeting a third straight week of gains, as the projections for global demand continue to climb amid rising vaccination rates and easing pandemic restrictions.

International benchmark Brent crude futures rallied 35 cents to $72.87 a barrel this morning, a day after closing at their highest since May 2019. Meanwhile, U.S. benchmark, West Texas Intermediate (WTI) crude futures climbed 80 cents to breach $71 per barrel, a day after their highest close since October 2018, for a gain of 1.12% on the day.

"Demand is coming back faster than supply and we're going to need more supply to meet that demand," said Phil Flynn, senior analyst at Price Futures Group in Chicago.

The International Energy Agency (IEA) noted in its monthly report that the Organization of Petroleum Exporting Countries and allies, known as OPEC+, would have to increase output to meet demand, which is projected to recover to pre-pandemic levels by the end of next year.

"OPEC+ needs to open the taps to keep the world oil markets adequately supplied," the Paris-based energy watchdog said.

Yet, climbing demand and countries' short-term policies may run contrary to the IEA's request to end new oil, gas, and coal funding.

"In 2022 there is scope for the 24-member OPEC+ group, led by Saudi Arabia and Russia, to ramp up crude supply by 1.4 million barrels per day (bpd) above its July 2021-March 2022 target," the IEA said.

Analysts are supportive of higher oil prices as well, with Goldman Sachs predicting Brent crude prices to notch $80 per barrel this summer as vaccine rollouts boost global economic activity.

Data revealing road traffic returning to pre-pandemic levels in North America and most of Europe was encouraging, ANZ Research analysts said in a note.

"Even the jet fuel market is showing signs of improvement, with flights in Europe rising 17% over the past two weeks, according to Eurocontrol," ANZ analysts said.

That's good news for crude oil ETFs like the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO), which are in the green on Friday as well.

The cyclical pattern of crude oil demand rising in the summer is common, as the EIA explained in its most recent report: "In warmer months, distillate demand typically decreases as a result of less heating demand, while gasoline demand typically rises because of more driving in the summer. According to our Weekly Petroleum Status Report data, distillate imports into the East Coast region averaged 208,000 b/d from April 2 through June 4, and gasoline imports averaged 816,000 b/d."

Oil has been rallying since the pandemic lows of April 2020, but appears to have broken through a months-long trading range based on technical analysis, with West Texas Intermediate futures surpassing the $70 mark to close at their highest since Oct. 2018 after briefly touching the key psychological level earlier this week. 

"Crude oil price shows more rise to start testing 71.00 barrier, reinforcing the expectations of continuing the bullish trend, which its next target located at 72.20, while achieving it required holding above 69.90," according to energy analysts at economies.com.

“We’re looking for a pretty sizable drawdown in U.S. crude oil inventories, while the demand thesis keeps improving,” said John Kilduff, a partner at Again Capital LLC. “This atmosphere remains bullish, as we’re heading into a structural deficit in terms of supply versus demand.”

For investors looking for crude ETFs to play the run-up in oil, which has been fairly steady since November, the United States 12 Month Oil Fund (USL) and the iPath Pure Beta Crude Oil ETN (OIL) are two funds to consider.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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