The VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) earned big for holders on Monday after a surprise turn in the price of oil drove the cost of the energy source higher on futures markets.The price of oil jumped on this morning’s market after Saudi Arabia revealed that it had increased the prices it was charging to sell oil in Asia.
That rise comes despite a nuclear deal made with Iran last week that may see some of the country’s massive oil production make its way onto international markets. The VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) is the most popular leveraged oil ETN on the market, with a capitalization of more than $750 million. The ETF was trading for $2.79 at time of writing, up 13.67% for the day so far.
Oil jumps as Saudis raise prices
Saudi Arabia increased the official price at which it sells oil to Asian buyers for the month of May. The move, which is the second in the same number of months, signals strong energy demand from Asia, allaying fears that Chinese weakness could slow down demand for the black liquid.
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The country’s State Oil company Saudi Aramco Oil Co actually lowered its prices for crude it sells to North America, reflecting oversupply in that market continuing its downward pressure on prices.
The VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) has been volatile in the opening months of 2015, but there has been a strong downward trend in the price of the leveraged note. Since January 1 the security has lost more than 40% of its value.
Iranian oil stays at home
On the other side of the equation, it appears that oil from Iran may take longer to reach international markets than was initially thought. Adam Longson, head of oil research for Morgan Stanley, said on Monday that the investment bank didn’t expect any physical impact from the deal until at least next year.
That means that there won’t be another supply glut to drive the price of the VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) down this year, at least not from Iran. It will take Iran’s oil infrastructure several months to ramp up production for exportation. Under investment in the country’s oil sector means that there may be less than 200,000 barrels to spare for exportation right now.
With those restrictions apparently placed on Iranian oil for at least a year, it’s unclear what exact effect the deal between the country and the world’s powers is going to have on the overall oil market.
Leveraged ETFs mean volatility
The VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) is a leveraged ETF, which means its change in price is supposed to represent a multiple of the change in the price of oil. That makes its movements much more volatile than those of the security underlying it, in this case oil.
The VelocityShares 3X Long Crude ETN (NYSEARCA:UWTI) is supposed to multiply the movements in the price of oil by three, but it can run against that principle obeying the laws of supply and demand in its own market rather than the oil market itself.