With Chinese stocks slumping to start the new year, risk appetite could be hard to come by and that is a scenario that could weigh on already downtrodden commodities, such as oil. The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, both plunged more than 40% last year.
Last month, crude oil prices fell to their lowest levels since early 2009 after OPEC’s meeting Friday ended without an agreement to lower production, Reuters reports. OPEC has been fueling a global supply glut in an attempt to maintain market share and squeeze out high-cost oil producers, such as the nascent shale industry in the U.S.
Oil’s tumble last year coupled with the aforementioned soaring production levels has prompted some overtly bearish forecast’s on crude prices for 2016.
USO and rival oil exchange traded products are some of the worst-performing commodities funds this year and that is saying something given investors’ rejection of commodities as an asset class. With 2016 here, commodities investors should temper expectations for a legitimate oil rebound next year. In fact, some analysts see more downside ahead for crude. [Leveraged ETFs Are Popular Plays Among Swing Traders]
“I think you’re going to get as low as $18 and maybe get as high as $48. … It’s going to get really ugly,” he told CNBC’s “Squawk Box.” “The Iranians doubled down again, if that’s even possible, by saying that they could put 500,000 more barrels on the market within weeks after the sanctions get lifted.”
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 International Energy Agency (IEA) said the “massive cushion has inflated” on record supplies from Iraq, Russia and Saudi Arabia.
However, there is some hope production will ebb this year.
“To be sure, the U.S. Energy Information Administration sees U.S. and other non-OPEC production declining by hundreds of thousands of barrels per day by the third quarter of 2016,” reports CNBC.
United States Oil Fund
