BOD: The Perfect Storm Unfolds (NYSEARCA: BOD)

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Investment thesis

Oil continues to benefit from a wide range of supply-side tailwinds and stable demand. It is now increasingly likely that the European Union will embargo Russian oil as soon as in early May 2022, which comes at a time when OPEC spare capacity is at an all-time low and global oil inventories are below the historical average for the past decade. If we add the fact that a number of Chinese cities were in lockdown in March and April 2022 and are expected to come out of it within the next couple of months, I think we have the necessary catalysts that will drive up the price of oil. . In this article, I will review the Invesco DB Oil ETF (NYSEARC: BOD), which provides exposure to light sweet crude oil futures.

Policy Details

The Invesco DB Oil Fund ETF tracks the investment results of the DBIQ Optimum Yield Crude Oil Excess Return Index. It is a rules-based index comprised of light sweet crude oil futures, with the remaining assets invested in US Treasury bonds.

You can read more about this strategy here.

Invesco

Invesco

Expect additional pressure from the supply side

I am personally bullish on the price of oil over the next two months as supply continues to be constrained by a number of macroeconomic and political factors. Heading into 2022, we already had one of OPEC’s lowest spare capacities at a time when global oil demand was strong. According to a recent PIMCO report, spare capacity in OPEC+ was around 3%-3.5% before the conflict in Ukraine, compared to around 8-9% in 2002. However, it is now estimated from recent negotiations with energy authorities in the Middle East. that number could be significantly lower, at just 2.5%.

US EIA

US EIA

It comes at a time when global oil inventories have fallen at their fastest pace on record in the past 18 months, dropping more than 600 million barrels as slow production failed to keep up with the pace. pace of growing demand. Unsurprisingly, oil inventories are currently at their lowest level in ten years and are well below the 2010-14 average. If demand for oil remains strong, I think the end result will be prices going up until it eventually goes down.

Product Background

Product Background

The Russian invasion of Ukraine makes this subject even more complex as European countries actively discuss an embargo on Russian oil. Recently, Germany announced that it would not object to such a measure and a new EU sanctions package against Russia is expected next week. Energy could very well be one of them.

We cannot ignore the fact that Russia is one of the world’s leading oil suppliers, accounting for 12% of world oil trade. The US and Canada have already banned imports of Russian oil and the EU is expected to join them soon, putting further pressure on global supply and ultimately the price of this commodity. .

UBS/Bloomberg

UBS/Bloomberg

As a result, oil could very well top $130 a barrel in Q3 2022 by some estimates.

Morgan Stanley

Morgan Stanley

Demand continues to be strong

According to the IEA, oil demand is expected to remain positive throughout 2022, although the rate of demand growth is expected to be lower than in 2021. Unless growth turns negative, it is difficult to see how oil prices will decline given the current supply challenges.

Morgan Stanley / IEA

Morgan Stanley / IEA

A recession in the United States and Europe could contribute to weakening demand for oil. This scenario is now more likely than 6 months ago as economic growth has slowed in both regions and recent quarterly US GDP data has taken markets by surprise. That said, US consumer confidence continues to be flat and above the March 2020 COVID-19 lows, leaving ample room for oil prices to rise until a recession hits.

Refinitiv Eikon

Refinitiv Eikon

In Europe, however, the situation is deteriorating more rapidly. The war in Ukraine has dragged consumer confidence well below the long-term average and is approaching levels seen in the first quarter of 2020. Although consumers have yet to capitulate, it would be interesting to watch future readings for get an idea of ​​where we might be heading.

Refinitiv Eikon

Refinitiv Eikon

At the same time, I believe China’s oil demand is expected to increase in the coming months compared to March and April 2022 as the country gradually emerges from lockdown. To put China’s role in the global oil market, the country accounted for about 16% of total oil consumption in 2018.

Mackenzie Wood/RAW/WBMS

Mackenzie Wood/RAW/WBMS

Key points to remember

I believe we now have the perfect storm that will drive oil prices higher in the months ahead. Oil continues to benefit from a variety of supply-side tailwinds and solid demand in the US and Europe. If the EU imposes a ban on Russian oil, we could very well see oil jump to $130/bbl before Q3 2022 as OPEC spare capacity and global oil inventories are at historic lows. .

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