Oil prices have been among the most-typed investment words this year. United States Oil Fund, LP USO has advanced 50% this year but added only 2.7% in Q2 (read: Top ETF Stories of Q2 That Should be Watched in Q3).
The coronavirus vaccine rollout is gradually helping to control the spread of the outbreak across the globe. Factors like easing Omicron concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East have thus boosted oil prices this year.
But heightened recessionary fears in Q2 weighed on the prospects of oil consumption, which is why oil prices gained mildly.
What Lies Ahead for Q3?
Oil prices are showing no signs of easing even as China’s economy has started reopening, resulting in increased demand and supply worries primarily due to the Russia-Ukraine war. Russia is oil rich and hence West’s abandonment of Russia has made the supply matter worse.
But then recessionary fears are rife. The Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest increase since 1994 — and signaled continued tightening ahead, which could further weigh on risk-on trade sentiments. The U.S. yield curve again inverted in June after April, giving cues of a recession.
An increase in interest rates means higher loan rates for consumers and businesses, which in turn has hurt economic growth. Most investment banks are warning of a recession. Deloitte sees about 15% chance of U.S. economic recession, as quoted on a New York Times article. Morgan Stanley sees the probability of a recession in the next 12 months at about 30%, according to the bank’s models (read: 5 Winning ETF Areas of a Lackluster June).
If recessionary fears continue, oil prices would see some slowdown in demand and hence the price is not likely to shoot up ahead. And if the economies manage to cope with the inflation and hawkish central bank policies, oil may see modest pricing gains in Q3 after a muted Q2.
Against this backdrop, investors must be interested in keeping track of oil and energy ETFs. We highlight some ETFs for them below.
ETFs in Focus
United States Oil Fund LP (USO)
The underlying West Texas Intermediate Light Sweet Crude Oil Index looks to reflect the daily changes of the spot price of light, sweet crude oil delivered to Cushing, OK. The fund charges 83 bps in fees.
Invesco DB Oil Fund (DBO)
The underlying DBIQ Optimum Yield Crude Oil Index Excess Return Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the performance of crude oil. The fund charges 77 bps in fees.
United States Natural Gas Fund LP UNG
The Natural Gas Price Index is the futures contract on natural gas as traded on the NYMEX. The expense ratio of UNG is 1.35% annually.
Invesco DB Energy Fund DBE
The DBIQ Optimum Yield Energy Index Excess Return Index is a rules-based index composed of futures contracts on some of the most heavily traded energy commodities in the world: Light Sweet Crude Oil (WTI); Heating Oil; Brent Crude Oil; RBOB Gasoline; & Natural Gas. It is intended to reflect the performance of the energy sector. The fund charges 77 bps in fees.
United States Brent Oil Fund LP (BNO)
The Brent crude oil looks to track the daily changes in percentage terms of the spot price of Brent crude oil. The fund’s expense ratio is 1.13% annually.
United States Gasoline Fund LP UGA
The underlying Gasoline Price Index looks to reflect the changes in the price of gasoline, as measured by the price of the contract on unleaded gasoline for delivery to the New York harbor, traded on the NYMEX that is the near month to expire, except when the near contract is within two weeks of expiration, in which case it will be measured by the contract that is the next month contract to expire. The expense ratio is 1.02% annually.
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United States Oil ETF (USO): ETF Research Reports
United States Gasoline ETF (UGA): ETF Research Reports
Invesco DB Energy ETF (DBE): ETF Research Reports
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