After the rebound in energy prices, some oil exchange traded fund traders are growing wary of the continued strength in the energy market, trimming exposure to the asset.
Since its March 17 low, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has surged 27.8%. WTI crude oil futures recently touched $62 per barrel, its highest in five months.
However, oil ETF investors are exiting their positions, which some see as a prudent move in response to weak market fundamentals ahead, reports Catherine Ngai for Reuters.
Specifically, ETF investors yanked $478 million in the three weeks ended May 6 from four of the largest oil-specific ETFs, including USO, according to ThomsonReuters Lipper – data suggest that it was the largest withdrawal since the start of 2014.
“The outflows we’re seeing is people trying to take money off the table,” Gene McGillian, senior analyst at Tradition Energy, said in the article. “Things got too overextended, and some of the smarter guys are saying they should take some profits off and protect themselves.”
Now, some analysts and traders warn that the recent selling in oil-related ETFs augur potential problems to come and reflect less optimistic investor sentiment.
Market watchers are voicing concerns relating to greater U.S. production in response to the rising prices. There is a growing supply build up from hydraulic fracturing drillers just waiting on higher prices. [Energy ETFs: Drillers Can Shoot Their Own Feet If Not Careful]
For instance, Citibank analysts have grown cautious over their outlook.
“The cold fundamentals are somewhat in contrast to the large inflows of hot money,” Citibank analysts said.
Looking at a more long-term outlook, energy investors should not expect outsized gains to last as the Organization of the Petroleum Exporting Countries, or OPEC, anticipates oil prices to trade below $100 over the next decade.
A price of “$100 is not in any of the scenarios,” a delegate at the OPEC strategy presentation said, according to the Wall Street Journal.
United States Oil Fund
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Max Chen contributed to this article.