By ETF Heat Map Team

The oil prices surged this week on account of a large drop in U.S. crude supplies, which was the largest shortfall since 1999. Hurricane Hermine and tropical storms appear to have halted the movement of oil tankers and shut in offshore drilling. As a result, oil prices moved higher and the prices on the New York Mercantile Exchange hit as high as $47.62 per barrel for the October contract. Given some of the these events maybe shorter term in nature, oil prices will be volatile over the next little while. As such, we discuss certain events and oil ETFs that market participants should consider.

Oil and currency related ETFs worth exploring from the ETF Heat Map screener and database include:

  • USO – United States Oil Fund
  • IEO – iShares U.S. Oil & Gas Exploration & Production ETF
  • DTO – PowerShares DB Crude Oil Double Short ETN
  • UUP – PowerShares DB US Dollar Index Bullish Fund

IEO, an iShares product, seeks to track the investment results of an index composed of U.S. equities in the oil and gas exploration and production sector. It has returned approximately 8% YTD, while having a 30 SEC yield of approximately 1.5% and an expense ratio of 0.44%.

ieo

Market participants also has to consider that oil is priced in US dollars, which has been strengthening since 2015. Given, it is traded in dollars globally, there will be periods of inverse correlations between the strength of the dollar and the price of oil (say measured by WTI). The oil market is expected to see a lot of volatility in trading ahead of the OPEC meeting. However, the reaction of market will depend upon what outcome the market expects in the coming month.

An oil output freeze is possibly on cards when the OPEC meets in Algeria later this month during informal talks from September 26 to 28, 2016. Furthermore, EIA has reported a decline of 14.5 million barrels in storage last week, largely on account of Hurricane Hermine leading to limits on oil productions and imports, and a supply drop. According to this data, the supply shortage in the market was overcome with using the oil in storage largely from the East Coast and Gulf Coast.

In the upcoming meeting, OPEC members will agree on an output cap that will help to put a floor under prices. The minimum floor prices are expected to go from the previous $26 per barrel in February up to $45. However, most expect the meeting of the OPEC members to only be symbolic in nature. Given, the market is oversupplied, and Iran plans to increase production to pre-sanctions levels (favored by Russia and Saudi Arabian governments), the oil volatility will continue to play out.

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