West Texas Intermediate futures surged last week, soaring 20 percent over the week’s last two days for the biggest two-day rally in seven years. For a change, oil prices enjoyed a banner showing last week with crude futures surging 9% last Friday, helping the the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, to a gain of more than 8.3% on heavy volume.
However, some of those gains were given back Monday as West Texas Intermediate futures fell nearly 6% per barrel and it appears that last week’s rally emboldened traders to up their bearish wagers on crude oil prices.
“Bets that crude oil will retreat below $25 a barrel have reached an all-time high as stockpiles continue to grow,” reports Bloomberg. “Open interest, or the amount of total contracts outstanding, for March West Texas Intermediate crude $25 put options rose to 29,023 on Jan. 22, the highest among all March WTI options. The puts expire on Feb. 17.”
West Texas Intermediate futures closed at $30.36 per barrel on Monday. On the demand side, China, which consumes about 12% of the world’s crude oil, could see lower demand as economy shifts to a less energy-intensive economic model, the Wall Street Journal reports.
Consequently, the markets may be in for an extended low oil environment. The International Energy Agency also recently warned that the world could “drown in oversupply” of oil in 2016, especially as Iran’s exports begin flowing into global markets.
“Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI futures, climbed to 64.2 million barrels in the week ended Jan. 15, the highest level since Energy Information Administration started to track weekly data in 2004,” according to Bloomberg.
Goldman Sachs Group has also forecast oil to drop to $20 per barrel but attributes further weakness to potential storage tank limits as producers keep pumping until they completely fill up storage space and halt some production. However, Goldman also sees a new bull market being born from oil’s current bear market in the second half of 2016.
United States Oil Fund
