Tropical Storms Put These Oil ETFs in Focus

Oil price has shown some strength over the past couple of days on potential production curbs. This is especially true as the two tropical storms — Marco and Laura — threatened more than half of the production in the Gulf of Mexico and prompted refinery cuts.  

Energy companies have cut production at U.S. Gulf Coast oil refineries after shutting 82% of the area’s offshore crude oil output. Producers have shut more than 1.5 million barrels per day of Gulf Coast offshore oil production or nearly 14% of the nation’s total output. The Saudi Aramco-owned Port Arthur refinery, which can process more than 600,000 barrels a day, has halted production, while Total and Valero have also closed their East Texas refineries, taking another 560,000 barrels a day of throughput capacity offline, per Reuters (read: S&P 500 Near Record Close: 3 Winning Sectors & ETFs).

The Interior Department’s Bureau of Safety and Environmental Enforcement has estimated that 84.3% of offshore oil production in the Gulf of Mexico, or about 1.6 million barrels of oil a day, had shuttered, along with nearly 61% of natural gas production.

According to the latest National Hurricane Center estimates, the risk of a major double hit has lessened. Storm Laura is still expected to become a major hurricane but storm Marco has weakened and dissipated soon.

Apart from oil output disruptions, signs of progress in the development of a COVID-19 treatment also supported the oil price. The Food and Drug Administration approved the use of convalescent plasma from recovered COVID-19 patients as a treatment for serious coronavirus cases. At the same time, the Trump administration is seeking emergency use authorization for an experimental vaccine being developed by AstraZeneca AZN and Oxford University ahead of the Nov 3 presidential election, according to the Financial Times (read: Bet on These Momentum & High-Beta ETFs on Treatment Hopes).

Added to the strength is the optimism over the trade negotiation between the United States and China and upbeat data from Germany that both pointed toward faster recovery and diminished persisting fears over recovery of global oil demand.

The latest news has pushed crude price to near its highest level in six months. U.S. crude futures rose as much as $43.56 on Aug 25. This is incidentally the highest since the first week of March.

ETF Impact

This has resulted in a spike in oil ETFs. iPath S&P GSCI Crude Oil Total Return Index ETN OIL has been the biggest gainer, rising 4.6% in the past couple of days. United States Brent Oil Fund BNO, Invesco DB Oil Fund DBO, ProShares K-1 Free Crude Oil Strategy ETF OILK and United States Oil Fund USO gained more than 2% each (see: all the Energy ETFs here).

While the returns of these funds are tied to the oil price, they are different in some way or the other. This is especially true as OIL delivers returns through an unleveraged investment in the WTI crude oil futures contract while BNO tracks the daily price movements of Brent crude oil. DBO tracks the DBIQ Optimum Yield Crude Oil Index Excess Return, which is a rules-based index composed of futures contracts on light sweet crude oil (WTI).

OILK provides total return through actively managed exposure to the WTI crude oil futures markets. It is not intended to track the performance of the spot price of WTI crude oil and should be expected to perform very differently. USO seeks to invest in the average daily percentage change in net asset value, for any period of 30 successive valuation days, to be within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period.

Bottom Line

The strength in oil price seems short-lived given the temporary supply disruptions and bleak picture of future demand. Though the global demand came roaring back to about 89% of pre-coronavirus levels, it expected to plateau at around 92-95% of pre-COVID levels through the first quarter of 2021, according to a new analysis by IHS Markit. This because fewer people are commuting to work and air travel demand has also waned. Notably, oil demand hinges largely on jet fuel and U.S. gasoline demand (read: Travel & Leisure ETFs Jump on Vaccine Optimism).

Per the International Monetary Fund, the coronavirus crisis will lead to global oil demand dropping by around 8% year over year this year. The International Energy Agency expects global oil demand to drop by 7.9 million barrels per day this year, citing that the recent resurgence in COVID-19 cases and reinstating of partial lockdowns in some countries have lead to uncertainty in oil demand.

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AstraZeneca PLC (AZN): Free Stock Analysis Report
Invesco DB Oil ETF (DBO): ETF Research Reports
United States Oil ETF (USO): ETF Research Reports
iPath Pure Beta Crude Oil ETN (OIL): ETF Research Reports
United States Brent Oil ETF (BNO): ETF Research Reports
ProShares K1 Free Crude Oil Strategy ETF (OILK): 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.

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