Oil ETFs Surging With Crude Prices

May 05, 2015

Crude oil prices hit their highs for the year this morning, adding more than 40 percent since hitting recent lows in December. They are rebounding thanks in part to renewed geopolitical concern centered on the Middle East. But the uptick is most likely the beginning of a longer-trend correction, some say, due to the fact that oil had gotten so cheap that it was trading well below its average cost of production.


Higher prices are a boon for oil-linked ETFs. WTI is now up some 43 percent from its low of $42 per barrel in December The global oil benchmark Brent is delivering similar gains, trading now at about $70 a barrel.


The biggest and most liquid ETF in this segment, the United States Oil (USO | B-100), has gained 15 percent in the past month alone.


USO owns nearby Nymex WTI crude, and the front end of the futures curve is the most sensitive to the “here and now,” making the fund a great proxy for what’s happening in the oil market.


The United States Brent Oil Fund (BNO | C-61), which owns Brent futures, is also up nearly 15 percent as well in the same period, as the chart below shows: 



“Despite near-record U.S. production, record Saudi production, slowing global economies, and expectations that higher prices will bring a flood of new supply as cash-starved frackers start pumping again; it appears the squeeze combined with Middle East tensions is driving the resurgence (for now),” Tyler Durden, of Zero Hedge said in a commentary this morning.


But some argue that the ongoing strength is unlikely to be a dead-cat bounce. Randall Abramson, CEO and portfolio manager at Trapeze Asset Management, says that the stagnation in many economies around the world and the resulting accommodative monetary policies are reasons to like the resource sector because “reflation” should be around the corner.


Too Cheap To Produce

“There's no question that the sector has been in a bear market because we define any drop greater than 20 percent as a bear market,” Abramson said in an interview with HardAssetsInvestor. “Yet it’s the most unusual energy bear market I’ve witnessed in my 25 years in the business. It’s rare to get a sell-off like this that is not precipitated by a recession. The demand for oil is ever growing.”


According to him, no one has a crystal ball as to what happens next in the oil market, but we should see higher oil prices in the next six to nine months “ … because it’s unbelievably rare to be trading below the average all-in cost of production. The all-in cost of production is in the $55-60/bbl range.”


A Long Way Up

But for ETF investors, recouping the losses will take a far more dramatic retracement ahead in oil. Consider that a fund like USO has remained more than 44 percent in the red in the past 12 months. BNO is down 44.1 percent in the last year. 


Charts courtesy of StockCharts.com


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