Oil markets and commodity-related exchange traded funds dipped back into bear market territory Tuesday as a confluence of increased supply, Greece volatility, China slowdown fears and hedge fund bets weighed on energy prices.
Since the May 6 high, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, fell as much as 21.1% Tuesday and United States Brent Oil Fund (NYSEArca: BNO) declined as much as 22.4%.
The oil markets, though, pared some of their earlier losses, with WTI futures trading at $52.0 per barrel and Brent crude hovering around $56.6 per barrel by mid-day Tuesday.
The rising global oil supply glut has kept pressure on energy prices. In the U.S., shale oil production remains resilient and held up in most of the major areas, with the recent number of oil rigs drilling in the U.S. rising for the first time in 29 weeks, Financial Times reports. Additionally, U.S. crude oil inventories were above 465 million barrels last week or at around record highs. [Oil ETFs: Higher Demand Won’t Be Enough to Offset Supply Glut]
Meanwhile, among the Organization of Petroleum Exporting Countries, oil production also increased, rising to a three-year high in June, with Saudi Arabia and Iraq output near record highs. Market observers project OPEC’s output at 1.5 million barrels per day above its 30 million per day target.
Additionally, as the U.S. and Iran try to finalize a nuclear deal, many anticipate even more oil to hit the global market once sanctions against Iranian oil are curbed. Some estimate that Iran could add 800,000 barrels per day to the market within the year.
The ongoing Greece drama has added to global volatility and risk aversion. Consequently, the U.S. dollar has strengthened as a safe-haven play, leading to a drop in commodities, like oil, that are priced in USD.
On Tuesday, oil markets were also pressured after the plunge in Chinese equities. The perceived weakness in the Chinese economy, the second largest in the world, sent shock waves through the commodities market.
“Data on the demand side out of China, such as crude oil imports, has been weak lately and has contributed to oversupply fears,” Carsten Menke, commodities analyst at Julius Baer, said in the FT article. “Taken together with falling metal prices, commodity markets are signalling broad-based concerns about Chinese demand and the government’s ability to stimulate growth.”
Moreover, hedge funds have cut long positions by about a third to less than 200 million barrels from about 289 million barrels of oil during the run-up to the May highs.
United States Oil Fund
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.