Oil prices have experienced a precipitous fall over the past year. However, energy exchange traded fund investors should not bet on a swift return to $100 per barrels any time soon.
Over the past year, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil futures, plunged 56.4% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, plummeted 56.7%.
WTI crude oil futures were hovering around $46.8 per barrel Thursday while Brent crude futures were trading around $48.7 per barrel.
Looking ahead, we may be in for low oil prices for much longer than many anticipated. The Organization of Petroleum Exporting Countries, or OPEC, projects oil prices will rise by no more than $5 per barrel per year and will eventually reach $80 per barrel by 2020 or $100 per barrel by 2030 to 2040, Reuters reports.
“Brent structure has been appreciably weaker than that of WTI (U.S. crude) as it remains much more sensitive to the bearish element of increasing availability of North Sea barrels, excessive OPEC output and Chinese economic concerns,” Jim Ritterbusch, president at Ritterbusch & Associates, said in a note.
However, the current environment of low oil prices is doing exactly what OPEC wants: to squeeze out new high-cost energy producers – oil prices have plunged after a new surge in supply, largely from competitors like U.S. shale oil. According to OPEC sources, non-OPEC supply could amount to 58,2 million barrels per day by 2017, or some 1 million barrels per day lower than previous estimates.
“It’s much harder for OPEC to lift prices” after the revolution of U.S. shale oil, Bjarne Schieldrop, chief commodities analyst at SEB AB, told Bloomberg. “Eighty dollars by 2020 is pretty close to consensus view.”
Over the short-term, shifting demand and supply dynamics could help add to modest swings. For instance, the number of Americans filing for new applications for unemployment benefits dipped last week to the lowest in eight weeks, which is supportive of the demand outlook, according to John Kilduff, partner at Again Capital LLC.
OPEC also expects global demand growth to rise slowly over the medium-term on cheaper oil, with daily consumption to rise by 1 million barrels per year to 97.4 million in 2020.
On the supply side, U.S. crude inventories declined last week. Additionally, U.S. oil output is beginning to fall, with U.S. crude and condensate production peaking at 9.612 million barrels per day in April but it has since fallen by 316,000 barrels per day in June.
United States Oil Fund
For more information on the oil market, visit our oil category.
Max Chen contributed to this article.