Crude Oil ETFs (USO, OIL) Surge Following OPEC Decision

by on March 17, 2010 | ETFs Mentioned:

The Organization of Petroleum Exporting Countries (OPEC) has seen its influence over the global energy market wane in recent years, as a prolonged economic downturn caused demand for oil to plummet, limiting the effectiveness of the group’s once eagerly-anticipated supply decisions. But with a seemingly stable recovery underway and many emerging markets demonstrating an insatiable thirst for raw materials and energy, OPEC once again finds itself in a position of power. The bloc of oil rich nations didn’t hesitate to flex its muscles on Wednesday, showing that its decisions are still capable of impacting oil markets.

Despite calls from several members (including Africa’s two largest producers) to raise production ceilings, OPEC announced on Wednesday that it would hold its production quota steady. The decision means that oil supplies will remain relatively constant while demand is expected to strengthen as the global economy continues to emerge from the most recent recession. OPEC’s quotas have never been a true cap on production, as several members regularly exceed the stated thresholds. Still, the decision to leave the existing quota in place indicates that OPEC is intent on raising supplies methodically, and interested in sustaining a certain price level.

Crude Oil ETF Options Have SurgedAfter crude oil prices hit a four-year low near $32.40 per barrel in December 2008, OPEC members agreed to the largest ever cut in production, trimming 4.2 million barrels per day from outputs. At the time, several members objected, noting that swelling government deficits made a reduction in oil income potentially devastating. In January 2010, the 11 OPEC countries bound by production quotas (all members except Iraq) produced 26.64 million barrels a day, about 1.8 million above the target. All members exceeded their allotted production limits on the month.

Despite the overruns on production, the production cut seems to have been successful in accomplishing its objective. Crude oil prices have more than doubled since the start of 2009, recently trading around $82 per barrel.

Oil ETFs On The Move

Even before OPEC’s decision, oil ETFs had been trending higher after the dollar fell against the euro and pound on Tuesday and a report from the American Petroleum Institute revealed a greater-that-expected drawdown in U.S. gasoline inventories on Tuesday.

After treading water for the first two months of 2010, crude oil ETFs have surged higher in recent sessions, bolstered by a weak dollar, increasing demand, and now news that production will remain stable for the foreseeable future. The United States Oil Fund (USO) which is designed to track the movements of light, sweet crude oil, climbed nearly 4% on Tuesday and was up another 1% in pre-market trading on Wednesday. USO invests in NYMEX futures contracts on crude oil.


The iPath S&P GSCI Crude Oil Total Return ETN (OIL), an exchange-traded note linked to an index comprised of futures on crude oil, has also jumped in recent sessions. OIL climbed 2.4% in Tuesday trading, and jumped at the open on Wednesday following the OPEC quota news. OIL is now up more than 10% since mid-February.


Gas Left In The Tank?

With the supply piece of the puzzle now in place, investors will begin scrutinizing consumption patterns to determine where oil prices will head next. Analysts expect prices to head higher as the summer driving season nears, although estimates over where oil will peak in coming months vary significantly. The crude oil futures curve maintains a very moderate upward slope; August contracts are currently trading at less than 2% above April futures. Still, some see $100 oil as a very real possibility in the not-so-distant future.

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Disclosure: No positions at time of writing.