Energy ETFs Rocking With Oil At $50

Prices today rose more than $50 for the first time since last October.

Buoyed by a steady drip lower in U.S. production, oil finally looks like it may have turned the corner on a lasting basis.

WTI Crude Oil Price

Output in the U.S. is down 850,000 barrels per day from a year ago at the same time that global demand continues to grow robustly.

US Oil Production (1,000 barrels/day)

That has led the International Energy Agency to forecast that the oil market will largely be balanced by the second half of 2016.

Oil ETFs On The Rise

For oil ETF investors, all this spells good news. The United States Oil Fund (USO | B-100) is up 9% year-to-date, while the United States Brent Oil Fund (BNO) is up 24.3% in that period.

YTD Returns For USO, BNO

(USO's underperformance stems from the fact that there was a much steeper contango in the West Texas Intermediate (WTI) futures curve earlier this year than in the Brent futures curve. The higher roll costs for WTI ate into returns for USO, which tracks those futures).

Meanwhile, energy stock ETFs such as the Energy Select Sector SPDR Fund (XLE | A-90) are also doing well. XLE currently has a year-to-date gain of 12.2%, while the VanEck Vectors Unconventional Oil & Gas ETF (FRAK | B-25) is up 25.7%.

YTD Returns For XLE, FRAK

Bull Vs Bear

With prices well off their lows for both oil itself and oil-related equities, the question now becomes whether the rally can continue.

Bulls argue that the oil market will continue to tighten as U.S. output falls lower and demand rises. An oil price of $50 is still relatively low, they argue, and there's another $10 or $20 upside from here.

Bears, on the other hand, argue that there isn't much upside from these levels, and that prices may drop back down in the coming months. Inventories are at record levels, they point out; moreover, these higher prices will encourage energy companies to drill again, pushing U.S. production back up.

One notable shale oil producer, Pioneer Natural Resources, promised to bring online upward of 10 rigs when oil prices hit $50. Other companies may follow suit as it becomes profitable to drill again.

Open Questions
The doubling in the oil price in a few short months is notable, but it must be put in context. Prices are back to $50, but that's where they were only seven months ago.

Analysts and traders still have much to learn about the oil market in the post-shale world. After the big plunge in prices from more than $100 to $26, a reduction in output was expected.

Soon the market will find the answer to two big unknowns―how low U.S. output goes before turning around―and what price is necessary to bring supply back online so that future demand growth can be met.

Contact Sumit Roy at [email protected].