OPEC Decision Could Boost Crude Oil ETFs

by on December 23, 2009 | ETFs Mentioned:

In 2009, crude oil prices have surged from about $35 per barrel to nearly $80, making this a good year for many in the oil business. The Organization of Petroleum Exporting Countries (OPEC) has been one of the main beneficiaries of a recovering global economy, as a return in demand for crude has translated into increased profitability for global oil companies and the governments of oil-rich countries. At the latest OPEC ministerial meeting on Tuesday, group members took further steps to prevent against a collapse in prices, a move that could have broad global implications.

OPEC Headquarters in ViennaAt a gathering in Angola, OPEC members voted, as expected, to keep production quotas steady, the fourth time this year that production targets have been left unchanged. But OPEC members did express concern over elevated amounts of inventory, and took steps to ensure that high stocks of crude around the world does not translate into a dip in prices in the first half of 2010. “Demand growth in the emerging economies is improving, but the OECD remains in negative territory,” said Angolan oil minister Jose Maria Botelho de Vasconcelos. “The market continues to be well supplied with crude, and inventories are at high levels.”

To combat this abundance of inventory, OPEC representatives agreed to improve compliance with the 4.2 million barrels a day of output cuts to which they agreed last year. Initial compliance with the reduced quotas was strong, but the world’s major oil producers have begun to ease back in recent months as rising crude prices added temptation to slack on the cuts in output. Tuesday’s meeting yielded an agreement to improve discipline among OPEC countries, and come into compliance with the quotas.

Still, expectations for the effective output cuts that could result were varied. Secretary General Abdalla Salem el-Badri said that he wants to see OPEC members increase their compliance to more than 75% of the output cuts, while Saudi Arabian Oil Minister Ali Al Naimi indicated that he would like to see 100% compliance.

ETF Plays On OPEC’s Move

Crude oil prices can impact almost every sector of the domestic and international economy, contributing to spending decisions among consumers and affecting the profitability of resource-intensive businesses. The impact of this week’s meetings may not be fully felt for months to come, but three ETFs that could potentially see big moves on the news include:

  • Dow Jones Emerging Markets Energy Titans Index Fund (EEO): This ETF invests in companies focused on the development and production of crude oil and natural gas in the emerging world, and has big allocations to each of the four BRIC economies (approximately 80% of the total fund). Given the current political environment, domestic energy ETFs may not be the best way to play an expected rise in oil prices (read more about that here), but EEO could make a push higher if crude oil prices continue to strengthen.


  • United States Oil Fund (USO): This exchange-traded product employs a futures-based strategy, investing in near-month futures contracts on crude oil. While USO is one of the most direct ways to gain exposure to crude prices, investors should be aware that this fund has lagged the hypothetical return on spot prices by a wide margin this year, done in by contango in futures markets and other factors.


  • WidsomTree Middle East Dividend ETF (GULF): Middle East ETFs were battered last month as news of Dubai’s potential meltdown broke, but have recovered nicely in recent weeks as investors digested the situation fully. GULF has exposure to several of the world’s major oil producers, including Qatar, Egypt, the UAE, and Kuwait. If OPEC’s pledge to a new sense of discipline proves effective, these economies could be given a further boost by strong oil prices.


Disclosure: No positions at time of writing.