If the months ahead pass by like an average year for refinery maintenance, the current oil supply will keep energy prices pressured. However, in the off chance that producers keep outpacing demand, oil-storage tanks could overflow, potentially causing a major sell-off in crude and related exchange traded funds.
The U.S. Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has declined 17.6% year-to-date as WTI crude oil futures now trade around $47.6 per barrel. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
Oil prices are being pressured as a quarter of refineries are shut down this time of year for scheduled Spring repairs ahead of the summer driving season, reports Tom Randall for Bloomberg. Consequently, due to the diminished demand from refineries, more of the excess oil is going into storage facilities.
However, oil ETF traders should brace for the possibility that prices could go lower if 2015 matches up with the worst period in refinery outages and producers keep raising supply.
For instance, in the 10-years of maintenance-season data, Bloomberg Intelligence found that storage regions in Cushing, Oklahoma could see storage reach 95% of capacity and the U.S. Gulf Coast could see storage surge 126% of capacity if 2015 matches the worst period in a decade. Consequently, if storage overflows, the excess supply will have to be dumped on to the market, forcing prices lower.
On the supply side, America is pumping out more oil, even as prices continue to fall amid already high supply. According to the American Petroleum Institute, crude supplies jumped 10.5% million barrels for the week ended March 13, compared to forecasts of about a 3.7 million barrel increase, and storage levels are at a new record high, reports Myra Saefong for MarketWatch.
Additionally, a state-mandated time limit on drilling and major oil-tax incentive in North Dakota’s Bakken oil could fuel a production spike in the region, writes Brian Scheid for The Barrel.