'OPEC+ Large-Scale Production Cuts and Russian Sanctions'... Highly Volatile Crude Oil ETF

Last Week Crude Oil Inverse ETF Returns Turn Negative
OPEC+ Announces Largest Production Cut Since COVID-19
Europe to Ban Russian Crude Oil Imports Starting December

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Along with OPEC+'s decision for large-scale production cuts, the ban on Russian crude oil imports set to take effect from December is expected to drive up international oil prices. Reflecting this sentiment, the returns of inverse exchange-traded funds (ETFs) betting on a decline in oil prices have turned negative. Volatility in oil ETF returns is expected to increase for the time being.

According to the Korea Exchange on the 4th, last week (September 26?30), the KODEX WTI Crude Oil Futures Inverse (H) ETF posted a return of -4.69%. The TIGER Crude Oil Futures Inverse (H) ETF also showed -4.53%.

Over the past month, the returns of the two ETFs were 11.55% and 11.90%, respectively. However, returns dropped to the 1% range in mid-last month and turned negative starting last week.

Inverse oil ETFs are products that bet on a decline in international oil prices. Due to concerns over an economic recession amid a strong tightening policy stance, crude oil futures prices have been falling for four consecutive months since June. Because of the decline in international oil prices, inverse oil ETFs had relatively high returns.

The fact that inverse ETF returns have turned negative means that crude oil futures prices are rising. The reversal of returns within a week is attributed to discussions among oil-producing countries about production cuts. The Organization of the Petroleum Exporting Countries (OPEC) and Russia, part of the OPEC+ coalition, are expected to agree on production cuts exceeding 1 million barrels per day at their regular meeting on the 5th. This would be the largest scale since the COVID-19 pandemic.

[Image source=Yonhap News]

The market is concerned not only about OPEC+ production cuts but also about the upcoming sanctions on Russia. Kim So-hyun, a researcher at Daishin Securities, analyzed, "The possibility of oil price increases due to Europe's ban on Russian crude oil exports is higher than the results of the OPEC+ regular meeting."

Russia's average weekly crude oil exports to Europe by sea stand at about 820,000 barrels. If Europe's ban on Russian crude oil imports is enforced from December, crude oil export volumes are likely to decrease. The International Energy Agency (IEA) forecasted in February 2023 that Russia's crude oil production would decrease by 1.9 million barrels compared to the same month the previous year.

Researcher Kim pointed out, "Since the possibility of supply disruptions from Russia has increased, OPEC+ needs to increase crude oil production," adding, "The fact that most OPEC+ countries are producing crude oil at their capacity actually means they have a high ability to cut production."

However, the rise in oil ETF returns does not match the increase in international oil prices. Since oil ETFs track futures prices, considering rollover costs and others, returns may fall short of expectations.

This content was produced with the assistance of AI translation services.