The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up more than 15% in just the past five trading sessions as several major oil-producing nations have pledged to pare output.
That helps buoy the near-term fundamental case for crude, but oil’s charts indicate the commodity may have more room to run to the upside.
Qatar, Russia, Saudi Arabia and Venezuela have been in discussions to hold output steady at January levels, but only if other producers followed suit. There is also talk that Iraq, also a member of the Organization of Petroleum Exporting Countries (OPEC), could pare production.
However, the rebounding oil may not last. Zanganeh has not explicitly stated that Iran would keep its output at January levels. Iran had planned to increase output by at least 500,000 a day this year after the lifting of Western sanctions last month, CNBC reports.
“With its familiar ‘W’ shape, the pattern does not signal anything until the center peak is broken to the upside. But that does not mean we should ignore it, especially as momentum indicators show bullish divergences with price action by setting higher lows. That indicates that downside momentum has slowed as bears have lost just a little interest in pushing their agendas,” reports Michael Kahn for Barron’s.
Some observers also question the integrity of the countries as some have been known to deviate from the agreements – Russia failed to respect a similar agreement with OPEC producers in the 1990s. Due to the surge in popularity, the oil-related ETFs now hold a huge stake in the energy markets. For instance, USO now makes up a quarter of all contracts for April delivery on the New York Mercantile Exchange.
USO holds WTI futures contracts in the nearby month and rolls its cash into the next month’s contracts before being forced to take physical delivery.
Since USO needs to roll contracts upon expiry, the ETF will be subject to contango issues – near month March 2016 contracts trade at $29.12 while next month April 2016 contracts trade at $31.22, according to CME Group. Consequently, more sophisticated traders may short USO and go long later-dated futures to take advantage of the arbitrage opportunity when the fund rolls its contracts. [Positioning for an Oil ETF Rebound? Watch For Contango.]
United States Oil Fund
