Summer Driving Has Oil ETFs On The Spot

June 02, 2014

“As we enter into the summer travel season with warmer temperatures and tulips in bloom, thoughts of the historic cold are still fresh in the minds of Americans in many parts of the country,” Marshall L. Doney, AAA’s chief operating officer, said in a recent news release. “The winter blues appear to have given Americans the travel bug and a case of cruise cabin fever as travel for the holiday is expected to hit a new post-recession high.”

Beyond the traditional oil demand associated with summer driving, there are other fundamentals impacting the oil market to keep in mind. These fundamentals are behind the dispersion in performance we’ve seen between USO, USL, BNO and UGA so far this year.

USO BNO USL UGA-YTD Perf

Charts courtesy of StockCharts.com

USO has been outperforming its counterparts, with gains of 6.3 percent year-to-date. The fund is largely considered the U.S. oil benchmark in the ETF market. It’s also the largest oil ETF, with more than $466 million in assets, and it invests solely in near-month Nymex futures contracts on WTI crude oil.

The front end of the futures curve tends to react more strongly to news and events, which makes USO a relatively good proxy for what’s happening in the spot price of WTI oil. It also means that USO’s short-term focus on supply and demand for oil makes it that much more sensitive to volatility.

WTI has been outperforming Brent this year as new pipeline additions help drain the massive glut of oil in the U.S. Midwest, Hard Assets Investor analyst Sumit Roy told ETF.com.

“Midwest and Cushing inventories have plummeted as the new pipeline capacity has come online,” Roy said. “However, the glut of oil in the U.S. hasn’t disappeared; it’s merely been transferred from the Midwest to the Gulf Coast.”

“U.S. prices in general, for WTI and other grades of crude, should remain below prices for Brent as long as U.S. crude production keeps spiking,” he added.

Outside of the U.S., persistent labor unrest in Libya continues to “decimate supply in that country,” while proposed sanctions against Russia—the world’s second-largest oil producer—would also be detrimental to supplies globally, Roy says.

Demand, meanwhile, remains strong both domestically as well as abroad. The global economy is expanding, keeping consumption at record levels, even if concerns abound about slowing Chinese economic growth, notes Roy.

What does all this mean for the American driver concerned about the price of gas at the pump, or for an ETF investor wondering whether gasoline prices will spike this summer? Apparently, not all that much.

From an ETF perspective, UGA, which offers viable exposure to gasoline prices, is up merely 1.9 percent year-to-date. The fund, which invests in near-month Nymex futures contracts on RBOB gasoline, is relatively expensive to hold, costing investors 1.03 percent in expense ratio a year, or $103 per $10,000 invested.

“Right now, gasoline stockpiles are near normal levels, so we shouldn’t see a huge spike in gas prices, barring a shock to oil prices themselves,” Roy said.

 

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