The price of crude oil fell on global markets from the middle of 2014 and onward, and oil stocks also fell broadly. However, despite the benchmark Brent and West Texas Intermediate falling to lows on the scale of recent decades, there have been periods of price increases and news and events that have sparked investor activity. Such a moment occurred late last week and ended on last Tuesday, a four-day run in which ETF oil funds posted sharp increases. ETFs trade like stocks but are backed by commodities agreements and derivatives. Futures and options follow the value of the underlying commodity but are also subject to market demand factors. In recent months, the market has been held in a contango; a condition in which contracts with close expiration dates are lower than those coming later. When selling lower expiring contracts, there is little gain when having to pay more for the next.
Bullish Oil ETF investors
In the period October, 2014 to January, 2015 investors poured money into oil ETFs. Data provided by Bloomberg showed that the top four ETF funds took in more than $4 billion. Despite the trend of falling prices during that period, investors seemed to take the fall as the step before a turnaround. Among these investors, there is strong evidence of a conviction that oil will hit bottom and turn around for a lengthy run of rising value. The top four ETF funds were ProShares Ultra Bloomberg Crude Oil, the United States Oil Fund ETF, which took in $1.15 Billion in January, the iPath S&P GSCI Crude Oil Total Return Index ETN, and the PowerShares DB Oil Fund.
An Impressive Four-Day Run
The U.S. Oil Fund is the biggest oil ETF; it had more than 31 million shares on loan with short sellers in January. The fund follows the WTI benchmark. The fund rose 24 percent on the New York Stock Exchange over a four-day period through Tuesday, before dropping 6 percent on Wednesday. During this run, the WTI futures rose sharply to climb briefly above $50 per barrel on the New York Mercantile Exchange. These short-term futures prices provided a profitable spread between near and longer term contracts. The 24 percent rise was remarkable by any standards. Unlike oil stocks, ETFs provide some flexibility in investment approaches beyond long and short positions. ETF data moves throughout the day and can capture small movements.
News and Events
The leading global oil suppliers have maintained production levels despite the ongoing weakness in demand and prices. This position emphasizes market shares over price levels. In the United States, events include oil worker strikes that could affect many U.S. refineries and lower production, and the Congressional action on the proposed XL Pipeline to move tar sands to the Gulf refineries. The work stoppages have a more immediate potential to affect supply, but enactment of the pipeline authorization will put long-term pressure on supplies as Canadian tar sands compete for global markets.
The bullish ETF run may continue strong or at a more moderate pace. Experts have linked the underlying market conditions for crude oil to global production, supplies, and demand. Many oil shale producers in the United States booming shale regions have retreated. They have stopped production on many low producing sources as a first step for the long haul. Experts expect prices to rise if production falls so that there is a more favorable balance between demand and supply. However, in the last weeks of January, the nation added to its supplies by about 6.3 million barrels. The production levels that are in the global supply pipelines will not permit a rapid fall of supplies, nor will the willingness of drillers to produce more for any increase in demand. This imbalance leaves the future of the supply-demand equation in doubt. For the bullish ETF investors, it appears that it does not dampen their resolve.