Oil prices took a wild ride in 2020. After hitting historic lows in April, the commodity attracted widespread investor attention.
Most recently, United States Oil Fund (NYSE 🙂 has made headlines with reports it may receive from the US Securities and Exchange Commission (SEC) regarding restructuring measures it has taken in response of the oil price plunge in April.
Today we will take a closer look at the movements of the oil market in 2020, how it affected the USO and an alternative ETF that provides exposure to the commodity for that bullish oil:
Wild Price Moves And USO
Crude oil comes in various grades, but the global benchmark and the US benchmark are the main draw. Currently, WTI and Brent are at $ 42.81 and $ 44.98 respectively.
While both benchmarks were above $ 60 a barrel in early 2020, they had fallen to about $ 20 by April. At the time, investors realized that the new coronavirus pandemic would increase oil demand for most of the year. temper.
In addition, they were already in the middle of a dispute over production levels that scared the markets. After Russia refused to lower production levels, Saudi Arabia continued to respond.
Meanwhile, the price of the USO collapsed and lost more than 80% of its value at the end of April. The ETF started the year around $ 102. It ended February at $ 75.60. On April 28, the all-time low was $ 16.88. Now it hovers around $ 30.70.
When (or cash) oil prices collapsed in April, sales began to spread to futures contracts. USO does not buy real oil, but instead holds futures contracts, which must be "rolled over" into the coming months when they expire. This reality makes such commodity-based ETFs more suitable for short-term trading than for long-term investments.
In April, the price of the May WTI futures contract fell below zero for the first time in history, reaching a low of $ 40.32 a barrel. WTI ships in Cushing, Oklahoma (OK) and merchants expected a huge shortage of storage tanks in OK. The USO held most of its positions in June West Texas Intermediate futures contracts at the time.
In other words, USO's price mostly reflected short-term oil price movements, which went on a wild ride. To avoid further losses, fund managers have made changes to the structure of the ETF.
While USO was being revamped, a large number of retail investors believed, possibly erroneously, that this ETF was a proxy for the spot price of crude oil. Attracted by the low price at the time, they bought the ETF in large quantities, possibly as long-term investments in spot oil. However, USO is game to buy the futures market instead of cash.
Market participants currently considering buying USO should keep a close eye on legal developments.
Those optimistic about the liquid commodity may consider investing in another exchange traded fund:
Energy Select Sector SPDR Fund
Current Price: $ 36 , 26
52 Week Range: $ 22.88 – $ 61.80
Current Dividend Yield: 5.93%
Expense Ratio: 0.13% per year, or $ 13 with an investment of $ 10,000
The Energy Select Sector SPDR Fund (NYSE 🙂 provides exposure to oil and consumer fuel companies (slightly over 90% by weighting), as well as energy equipment and services industries ( almost 10% by weighing).
XLE tracks the index, which seeks to represent the energy sector of the index. The fund currently has 26 holdings and nearly $ 10.5 billion under management. The three largest companies in the ETF are Chevron (NYSE :), Exxon Mobil (NYSE :), Kinder Morgan (NYSE :), consisting of approximately the half of the fund.
So far in the year, XLE is down about 40%, but since it hit a multi-year low in March, ETF is up about 60%. Therefore, $ 1,000 invested in early spring would now be worth more than $ 1,600.
Oil company fortunes are typically linked to the price of crude oil, which is likely to be volatile in the coming months. There are three main factors that determine the oil price: demand, current supply (i.e. output) and access to future supply, which is dependent on oil reserves.
Crude oil is unlikely to hit its early 2020 peak in the coming months. As a result, both the stocks of oil companies and the price of XLE could come under pressure in the coming quarter.
In addition, there could be some dividend cuts in the sector. Interest rates are historically low. Therefore, many market participants looking for income are interested in dividend-paying stocks. Energy companies have had a special image for decades, especially for passive income investors. They knew they could count on that quarterly income. Experienced investors know how important dividend reinvestment is for long-term portfolios.
By 2020, many companies, including energy companies, will have reduced or completely eliminated their dividends. Oil major BP (LON 🙂 (NYSE 🙂 and Shell (NYSE :), (NYSE 🙂 are among those who have lowered their payouts.
But despite the difficulties they faced in the first half of the year, both Chevron and Exxon Mobil are getting their dividends. However, as the number of COVID-19 cases increases worldwide, investors should be prepared for a further hiccup in crude oil prices and a possible dividend cut by several other companies in the coming months.
