As the weeks and months unfold, and the President-elect and the GOP has to commit to articulating and passing real policy, traders will have to find ways to find opportunity in the uncertainty. Now more than ever, direction matters.
- GUSH –Daily S&P Oil & Gas Exp. & Prod. Bull 3x Shares (GUSH)
- DRIP – Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares (DRIP)
- ERX – Daily Energy Bull 3x Shares (ERX)
- ERY – Daily Energy Bear 3x Shares (ERY)
- Performance (as of 9/30/2016)
|Ticker||Fund Name||1M %||3M %||YTD %||1Y %||Since Inception||Inception Date||Expense Ratio* (Gross/Net) %|
|GUSH||Daily S&P Oil & Gas Exp. & Prod. Bull 3x Shares||NAV||10.73||24.56||35.25||-9.33||-67.10||5/28/2015||2.47 / 0.95|
|DRIP||Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares||NAV||-19.84||-38.90||-81.02||-82.82||-49.55||5/28/2015||2.11 / 0.95|
Despite skepticism about the efficacy of OPEC’s agreement, we think that oil (USO) (UCO) is set to rise in the medium term. Production cuts of ~1.8 MMbpd are large. They form ~2% of the total global oil output. Non-OPEC members made some decisive pledges to cut the output. Mexico would cut production by 100,000 bpd (barrels per day), Azerbaijan by 35,000 bpd, Oman by 40,000 bpd, and Kazakhstan by 20,000 bpd. Analysis by Goldman Sachs shows that if actual cuts amount to $1 MMbpd, West Texas Intermediate prices will average $55 per barrel in 1H17. Goldman Sachs analysis also shows that if both OPEC and non-OPEC members fully comply with the agreement, oil prices could rise above the $60 per barrel threshold in the first few months of next year (Source: oilprices.com, Goldman Sachs). These levels could definitely mean good news for oil producing nations that need higher oil prices to break even on their fiscal and current accounts. The previous graph shows the oil prices required for select OPEC nations to break even on their current account and the value of oil before the deal was announced.
The graph above shows the oil prices required for select OPEC nations to break even on their fiscal account and the value of oil before the deal was announced.
Even if US shale companies shore up their production to counter OPEC’s output agreement, the time taken to do so and for it to actually have an impact could take up to a year. In the meantime, it bodes well for oil prices.
Fitch Ratings estimates that crude oil consumption might exceed production by around 400 MMbpd in 1Q17. It also estimates that if the deal is extended and adhered to fully, consumption might exceed production by 1,300 MMbpd in 4Q17 (Source: Fitch, proshareng.com).
If the deal is fully adhered to, it could mean that things are looking up for the fuel. Investors could seek opportunities in the oil and energy sector (GUSH) (DRIP) as the deal comes into effect next year.