Energy ETFs Lag As Rising Oil Tops $60

November 01, 2017

Just when everyone left it for dead, oil prices are making an impressive comeback. Brent crude oil futures reached $61 on Monday, the best level of 2017 and the highest price since July 2015.

But not everyone believes the rally in crude is sustainable. While certain energy ETFs have followed Brent prices higher, others have lagged behind. What's going on?


Brent Crude Oil Price



Production Cut Extension

To answer that question, it's important to consider why oil prices are rising. According to news reports, the most recent upswing can be attributed to talk about OPEC and Russia potentially extending their production curbs beyond March 2018.

"The Kingdom affirms its readiness to extend the production cut agreement, which proved its feasibility by rebalancing supply and demand," Saudi Arabia crown prince Al Saud said earlier this week.

The production cuts―which were already extended once in May and total nearly 1.8 million barrels per day―have played a large part in helping to balance an oil market that's been weighed down by excess supply.

In a recent report, the International Energy Agency (IEA) said that oil inventories have fallen for three quarters in a row, and may remain stable next year if OPEC maintains its current production levels.

"There is little doubt that leading producers have recommitted to do whatever it takes to underpin the market and to support the long process of rebalancing," said the IEA.

WTI Lags

If the OPEC-Russia supply pact is the reason for oil's ascent, it's had an uneven impact on the various energy ETFs.

The United States Brent Oil Fund (BNO) is up 4.8% this year, but the United States Oil Fund LP (USO) has lagged far behind, with a loss of 6.6%.


YTD Return For USO, BNO



USO tracks West Texas Intermediate crude oil futures―WTI for short. That oil benchmark was last trading at only $54, a steep discount to Brent, due to climbing production in the U.S. and the limited ability to arbitrage away the difference.

"Logistical constraints saw crude oil stocks increase at Cushing, causing [WTI's] discount to Brent to blow out to nearly $7/bbl from only $2/bbl in June," explained the IEA.


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