Market Overview

Is It Time to Buy The Dip In Crude & Energy ETFs?

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Crude prices have been seesawing this year, rising 35% from its 2017 low to touch the highest level in more than two years only to see a steep slide on Nov 14 (read: Top ETF Stories of October 2017).

Hopes of further extension of the OPEC output cut deal until the end of the next year and signs of tighter oil markets led to gains in crude from October. United States Brent Oil BNO and United States Oil USO gained about 9.6% and 8.5% in the last one month (as of Nov 13, 2017), respectively. But both funds were off 2.2% and 1.9% on Nov 14, after the International Energy Agency (IEA) expressed doubts over the prevailing ideas of tightening fuel markets.

The agency lowered its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated 1.5 million bpd in 2017 and 1.3 million bpd in 2018, as per an article published on Reuters. As per IEA, tough times are waiting for the oil patch with supply expected to beat demand by 600,000 bpd in 1Q18 and a 200,000-bpd surplus forecast for Q2.

The main reason for this surplus would be the U.S. shale boom. As per an article published on investors.com, "the U.S. had already topped Russia in 2011 to be the world's No. 1 oil and gas producer, but the IEA's forecast would put the U.S. head and shoulders ahead of any rivals."

Time to Buy This Dip?

Investors should note that a report from the Organization of the Petroleum Exporting Countries (OPEC) – released a day before – is completely different from IEA. On Nov 13, 2017, the OPEC forecast higher demand for its oil in 2018. In its monthly oil market report, the OPEC fixed demand for "its crude 400,000 barrels a day higher than this year, at 33.4 million barrels a day".

The OPEC also beefed up global oil demand growth in 2018 by 130,000 barrels a day, to 1.51 million barrels. Adding to the euphoria, OPEC's secondary sources showed that the group produced less oil in October than the earlier month. This in turn cut down production by 150,900 barrels a day to 32.59 million barrels. Output decline was notable in Iraq, Nigeria, Venezuela and Algeria (read: Oil Price Scales 2-Yr High: 5 Best Energy ETFs & Stocks).

As per an article published on oilprice.com, OPEC analysts said "demand for crude is expected to reach 34m b/d in the second half of next year, roughly 1.4mmbpd above what they pumped last month."

Bottom Line

The historic output cut deal, wherein OPEC, Russia and other producers agreed to reduce output by 1.8 million barrels per day until next March, seems to have started paying off. Now, it remains to be seen which agency proves correct in predicting the oil market behavior in 2018.

However, IEA's view appears to be relatively long term. And OPEC looks steadfast in leaving no stone unturned in order to rebalance the oil market. Global growth is also looking up. Plus, geopolitical tension is rife in the Middle East, posing threats to oil supply. So, investors with a strong stomach for risks may play oil and energy ETFs for a medium-term bounce.

PowerShares DB Oil Fund DBO, iPath Series B S&P GSCI Crude Oil Total Return Index ETN OILB, Energy Select Sector SPDR Fund XLE, Vanguard Energy ETF VDE and iShares Global Energy ETF IXC are some of the products investors can look at (see all energy ETFs here).

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US-OIL FUND LP (ETF:USO): ETF Research Reports
 
ISHARS-GLB EGY (ETF:IXC): ETF Research Reports
 
PWRSH-DB OIL FD (ETF:DBO): ETF Research Reports
 
US BRENT OIL FD (ETF:BNO): ETF Research Reports
 
SPDR-EGY SELS (ETF:XLE): ETF Research Reports
 
VIPERS-ENERGY (ETF:VDE): ETF Research Reports
 
IPATH-SB SP CO (OILB): ETF Research Reports
 
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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

 

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