With oil prices stubbornly hovering near their 13-year lows, some oil exchange traded fund investors may be tempted to catch the falling knife. However, fundamentals won’t likely support the energy market any time soon.
Over the past year, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, plunged 50.1% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, plummeted 48.1%.
WTI crude oil futures are now trading around $30.8 per barrel while Brent crude was hovering at $34.0 per barrel.
As oil prices plunged, many anticipated that producers would ease up on the pumps, but energy companies are still bringing up oil at record rates. According to Wood Mackenzie Ltd., only 0.1% of global production has been curtailed over the past year because of profitability issues, reports Javier Blas for Bloomberg.
Wood Mackenzie calculates that only 100,000 barrels a day of oil has been impacted by the low prices since the start of 2015. In contrast, the International Energy Agency estimates that global production in the fourth quarter was 96.9 million barrels a day.
The analysis suggests that crude oil prices would have to decline even more, or stay at low prices for an extended period, to make a meaningful impact on global producers.
Over the past year, the Organization of Petroleum Exporting Countries has purposefully kept production high in an attempt to squeeze out high-cost producers, like the upstart U.S. shale oil industry, and help defend their market share. However, the nascent U.S. shale space is proving more resilient than previously anticipated.
Meanwhile, the depreciating currencies in oil-rich countries, like Russia and Brazil, have also helped lower production costs and kept these producers staying online for longer.
“Since the drop in oil prices last year there have been relatively few production shut-ins,” according to the Wood Mackenzie report.
The firm also cautioned against expecting further closures, because “many producers will continue to take the loss in the hope of a rebound in prices.”
Oil companies would rather run their operations at a loss over the short-term than have to incur the costs of completely closing down their shops, which may take months and cost millions of dollars.
“There are barriers to exit,” Robert Plummer, vice president of investment research at Wood Mackenzie, told Bloomberg.
Nevertheless, over the mid- to long-term, oil production may naturally fall as companies refrain from investing and drilling in new projects. Production typically declines at a 5% to 10% rate per year due to aging oilfields. Moreover, there is a steeper rate of decline in U.S. shale oil wells.
United States Oil Fund
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.