Credit: There is no doubt that oil has been one of the hottest and most volatile commodities so far this year. It is again showing large swings in its prices. Over the last three weeks, oil prices spiked 42% since its collapse back on February 11, when it briefly sunk to $26 a barrel.
This may be a sign that the global oil market hasregained some momentum, possibly indicating that the worst might be over for the commodity.
Continued Oil Rebound in the Cards?
Over the last several years, United States domestic production has almost doubled, consequently driving out other oil imports. Oil from Saudi Arabia, Nigeria, and Algeria once sold in the U.S. are now competing in the growing Asian markets. Canadian and Iraqi oil exports have been rising continuously year after year. And Russian production has even managed to stay steady, despite the country's economic problems.
There have been signs, however, that production is falling. On February 16, OPEC members Saudi Arabia, Venezuela, and Qatar, along with Russia, announced a plan to freeze output at current levels (for more information on OPEC, read our article " Everything You Need to Know About OPEC ").
Consulting firm Wood MacKenzie identified 68 large global oil and natural gas projects that have been put on hold since prices began to fall. RBC Capital Markets, meanwhile, has calculated that other oil projects, some capable of producing a half million barrels of oil per day, were cancelled, delayed, or shelved by OPEC countries in 2015 , with this year promising more of the same.
Despite this, a drop in production is not happening quickly enough, delaying the likelihood that prices will fully recover any time soon. Some analysts question how long the resurgence can be sustained since the global oil market remains substantially oversupplied.
Given the somewhat renewed optimism and improving supply & demand fundamentals, many oil ETFs and ETNs have seen smooth trading lately, and are doing better from longer time frames too. Two of the most popular ETFs in the space- United States Oil Fund (USO) and PowerShares DB Oil Fund DBO -both provide exposure to WTI oil, and have gained 11.69% and 5.51% over the past month, respectively.
Though the duo might appear similar at a glance, there are a number of key differences between the two that are detailed below.
USO
This is the largest and actively traded ETF in the oil space with AUM of $3.96 billion and average daily volume of around 527.15 million shares. The fund provides investors with exposure to front-month oil futures contract traded on the NYMEX. The expense ratio comes in at 0.74%.
As traders need to roll from one futures contract to another in order to avoid delivery, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near month contract is higher than the next month futures contract, this is backwardation and the opposite holds true for contango.
DBO
Unlike USO, this ETF follows the DBIQ Optimum Yield Crude Oil Index Excess Return plus the interest income from the fund's holdings of primarily US Treasury securities. The Index employs the rules based approach when rolling from one futures contract to another in order to minimize the effect of contango.
Instead of automatically rolling into the near-month oil futures contract, the benchmark selects the futures contract with a delivery month within the next 13 months, when the best possible "implied roll yield" is generated. As a result, DBO potentially maximizes the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
The fund has an AUM of $449.71 million and an average daily volume of $11.98 million. It trades in good volume of 1,612,424 shares a day on average.
Bottom Line
While DBO has better roll strategies with higher potential returns, it lagged USO in terms of investor preference. First, DBO charges a 33-bp higher initial fee. Second, it has some hidden costs in the form of bid/ask spread as the ETF trades in lower volume than USO. Further, the construction of the ETF is a bit complex and requires systematic study of many futures contracts. Either way, both look to be promising choices if the oil price surge continues later this year.
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US-OIL FUND LP (USO): ETF Research Reports
PWRSH-DB OIL FD (DBO): ETF Research Reports
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
