The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, closed lower Tuesday, but to USO’s credit, the exchange traded fund has steadied in recent weeks and is still sporting a one-month gain.
Despite oil’s recent upside, the long oil trade as attracted plenty of naysayers. However, there are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations.
With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
The Trade Weighted U.S. Dollar Index has increased 15% over the past year and is at its highest level in over 10 years, writes Karen Wallace for Morningstar. Energy ETFs can prove particularly vulnerable in the face of a stronger greenback.
Giving market observers reason to doubt the veracity oil’s rally is slumping demand at a time when none of the world’s major oil producers seem interested in paring production.
“Global oil demand growth is expected to slow in 2016 from a five-year high in 2015, according to the International Energy Agency’s (IEA) latest report, but no one seems to have told the Organization of Petroleum Exporting Countries (OPEC) which keeps pumping at record rates,” reports Holly Ellyatt for CNBC.