Oil ETFs Surge As 'Rubber Band Snaps'

April 11, 2019

Stocks have been getting all the headlines this year, and rightfully so. The S&P 500’s best start to a year in two decades is certainly worthy of attention. But lost in the commotion about stocks is another key asset—oil—which is also seeing its best start to a year in a long time.

WTI crude oil prices (the U.S. benchmark) surged 32.4% during the first quarter, good enough for the best Q1 since 2002—and the rally hasn’t let up. As of April 9, crude oil increased its year-to-date gains to 41.2% as West Texas Intermediate prices neared $65 per barrel.

Thanks to crude’s ascent, oil-tracking exchange-traded funds are among this year’s best-performing ETFs. That includes the $1.6 billion United States Oil Fund (USO), up 38%, and the $391 million VelocityShares 3x Long Crude Oil ETN (UWT), up a whopping 144.3%.

Sentiment Reversal

There are a number of reasons for crude oil’s sudden good fortune, not the least of which is the fact that prices tumbled last year. WTI lost about a quarter of its value in 2018, falling from a high of more than $76 in October to a low of $42 in December.

A lot of this year’s rally is merely a case of the rubber band stretching too far in one direction and then snapping back quickly. Oil, like stocks, recovered, as traders realized the global economy may not be in as bad shape as many had feared.

An anticipated resolution of the U.S.-China trade war and easier monetary policy in the U.S. were instrumental in turning sentiment around.

 

WTI Crude Oil Prices

 

Libya Civil Strife

But it’s not just a sentiment-driven rally in crude oil. Lately, supply concerns have been popping up, such as those related to Libya’s oil production. Violence in the North African nation has periodically disrupted production since the overthrow of former ruler Gaddafi in 2011, and renewed skirmishes threaten to halt output once again.

Khalifa Haftar, leader of the Libyan National Army, has promised to take over the capital city of Tripoli, while the internationally recognized government head Prime Minister Fayez al-Sarraj has vowed to resist his advances.

While Libya’s oil fields—most of which are under the control of Haftar—are unlikely to be affected by fighting in Tripoli, they could be if the conflict spreads in the country.

Currently, Libyan oil output stands at 1.1 million barrels per day, close to recent highs. But it’s fallen as low as 200,000 barrels per day when fighting picks up.

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