The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, tumbled 6.5% Monday on volume that was more than 20% above the trailing 90-day average, telling investors that bottoms may not be in yet for still struggling oil exchange traded funds.
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.
Remember that despite some modest, recent upside in oil futures, which was obliterated Monday, many big-name banks are still bearish in their oil outlooks, at least for the first half of this year. For example, 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.
“We’ve moved from $27 to $34, about a 25 percent move off the low, but we’re still moving in a downtrend,” Cornerstone Macro’s Carter Worth told “Fast Money” traders last week reports CNBC. “Bottoms look a certain way—they don’t look like this.”
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]
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. [Leveraged ETFs Are Popular Plays Among Swing Traders]
Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations. Moreover, oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects.
Investors will also be keeping a close eye on dividends, especially with oil prices at $30 per barrel. Oil CEOs have pledged to maintain their dividends, but with oil prices dipping to 13-year lows, traders are growing skittish.
United States Oil Fund
