To The Moon

Introduction

Investing in the energy sector is always a topic of interest, especially during times of production cuts and price fluctuations. In this article, we will explore investing in ETFs trading oil prices in view of the output cut announcement by OPEC and the seasonality changes.

Market trends and OPEC production cut

On 2 April 2023, OPEC announced an unexpected crude oil production cut of about 1.15 million barrels a day starting in May. The group, which includes OPEC and major allies such as Russia, had previously stated that it would hold supply steady. Saudi Arabia will cut output by 500,000 barrels per day. Kuwait, the United Arab Emirates, Iraq, Algeria, and Kuwait are among members that will also cut. Russia said its already-planned March-June cut will now last through 2023.

This announcement had an immediate effect on the energy markets, with Brent crude prices leaping and WTI futures soaring. Analysts expect the per-barrel price of Brent crude to rise to near $100 at the end of the year. If oil prices rise significantly and stay elevated, that could complicate the inflation picture and Fed’s interest rate projection.

Seasonality changes

In addition to the OPEC production cut, the seasonality changes in the energy sector also affect oil prices. Historically, oil prices tend to rise in the summer months due to higher demand for gasoline for driving and air conditioning, and a decrease in supply due to refinery maintenance. In contrast, prices tend to decrease in the winter months due to lower demand and higher supply from refinery maintenance. 

Crude Oil Futures Seasonality

It is essential to consider seasonality changes when investing in oil ETFs because they can have a significant impact on their performance. Investors should analyze the historical price trends of the specific ETFs they are interested in and compare them to the seasonality changes to determine if they are suitable investments.

Overview of ETFs trading oil prices

ETFs that trade oil prices provide investors with an opportunity to gain exposure to the energy sector without investing directly in oil futures.

One such ETF is $United States Brent Oil Fund LP(BNO)$ BNO, which tracks the performance of Brent crude oil prices. Brent crude is a benchmark used for the light oil market in Europe, Africa, and the Middle East, originating from oil fields in the North Sea between the Shetland Islands and Norway. Another popular ETF for oil investing is $United States Oil Fund(USO)$ USO, which tracks the performance of WTI crude oil prices. WTI crude is primarily produced in the United States and is a benchmark for oil prices in North America.

BNO

It is important to note that there are some key differences between these two ETFs. While BNO tracks Brent crude oil prices, USO tracks the performance of WTI crude oil prices. Additionally, USO invests primarily in front-month WTI crude oil futures contracts, while BNO invests in Brent crude oil futures contracts. These differences in underlying investments can result in different returns and levels of volatility.

USO

Summary

Investing in ETFs that track oil prices can be a way to capitalize on potential price increases in the commodity. However, it is important to keep in mind that there are risks associated with investing in oil, including fluctuations in oil prices due to supply and demand factors, geopolitical tensions, and economic conditions.

Based on the charts of USO and and BNO, we can see that the prices of oil have been declining since June last year which coincides with the first seasonality chart. We are now in April, which is a few months before the summer months where the prices of oil is expected to rise. The unexpected OPEC production cut and seasonality changes pointing towards a potential bullish trend for oil prices. Therefore Investing in ETFs that track oil prices such as BNO and USO could be a strategic move for investors looking to gain exposure to the commodity.

Please let me know in the comments if you think it is a good time to invest in Oil Related ETFs or stocks?

@TigerStars @MillionaireTiger @CaptainTiger @Daily_Discussion