The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has plunged nearly 49% over the past year, a decline that could be enough to scare plenty of investors and indicate upside will be hard to come by. However, there are some technical signs that point to some positive near-term possibilities for oil.
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. The IEA said the “massive cushion has inflated” on record supplies from Iraq, Russia and Saudi Arabia.
“Finally, the momentum indicator above the price chart is a 14-period Relative Strength Index (RSI) which simply measures recent gains and losses to determine whether price is gaining or losing strength in the direction of the trend. In this case, the momentum indicator is showing weakening bearish momentum. When price makes new lows on weaker bearish momentum, this is deemed a bullish momentum divergence and may lead to a crude oil bottom. That said, nobody knows exactly when the divergence will bear meaning (as far as time goes). Just check the chart out – the divergence has been ongoing for much of the year,” according to See It Market.
With 2016 drawing near, commodities investors should temper expectations for a legitimate oil rebound next year. In fact, some analysts see more downside ahead for crude. OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers. [Oil ETFs Face World-Record Supply Glut]
Even with the numerous headwinds, investors have been lured to USO and equity-based energy ETFs this year, a sign many of have been willing to take risks in search of a bottom in oil.