OPEC Output Cut Extended To 2020: Will These ETFs Gain?

Offering the much-needed relief to the investing world,OPEC has decided to extend the oil production cut into 2020, in an effort to boost oil prices. Russia will also join the OPEC in doing the same. Concerns over global demand growth and steady output gains in America’s shale fields led to the extension of the output cut.

Investors should note that OPEC and non-OPEC leaders first decided to reduce output on Nov 30, 2016, in Vienna. Then, OPEC and non-OPEC oil behemoth Russia decided in late-2017 to extend oil production cuts until the end of 2018 only to renew the agreement in late 2018 and prolong the deal for the first six months of 2019.

Now, the deal has been extended for another nine months, till March 2020. Russia should be pleased to prolong the cut by nine more months as Russian oil companies find it tough to raise production over winter, per an article published on Bloomberg. The idea of a longer-than-expected extension was first broached by President Vladimir Putin at the G-20 summit in Japan on meeting Saudi Arabia’s crown prince.

On Saturday, Russian President Vladimir Putin indicated that he had agreed with Saudi Arabia to prolong global output cuts of 1.2 million barrels per day, or 1.2% of global demand, for an additional six to nine months.

Why Continue the Cut?

“It was observed that the oil demand growth for 2019 has been revised down to 1.14 million barrels a day (mb/d), while non-OPEC supply in 2019 is expected to grow at a robust pace of 2.14 mb/d year-on-year,” per OPEC.

Sluggish growth in China and India led to reduced demand growth while the shale boom places the United States close to becoming a net oil exporter. Investors should also note that the output cut strategy led the Organization of Petroleum Exporting Countries’ share of the global oil market to slip to the lowest since 1991.

Impact on the Oil Patch

We expect moderate price gains in oil in the near future given continuation of the OPEC output cut, U.S. sanctions on Iran and Venezuela, the ongoing Iran-induced tension in the strait of Hormuz and a looming conflict in Libya. Iran's exports have slipped to 0.3 million barrels per day in June from as much as 2.5 million bpd in April 2018 due to fresh U.S. sanctions (read: Iran Downs U.S. Drone: Sector ETFs & Stocks to Gain).

However, a lot depends on the US-China trade relation. If the duo will be able to cut a long-lasting deal, oil prices should rise on improved demand outlook. However, no concrete truce term has been decided yet, which could keep oil prices volatile in the near term.

ETFs in Focus

This has compelled many investors to look into the oil commodity world and these ETFs (see all Energy ETFs here).

United States Brent Oil Fund (ASX:BNO)

United States Oil Fund (NYSE:USO) USO

Invesco DB Oil Fund (TSX:DBO)

US Commodity Funds United States 12 Month Oil USL

We highlight a few regular energy ETFs that should also be watched closely.

Invesco S&P SmallCap Energy ETF (NYSE:XLE) PSCE

VanEck Vectors Unconventional Oil & Gas ETF FRAK

SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP) ETF (CSE:XOP)

John Hancock Multifactor Energy ETF JHME

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