ETF Trends
ETF Trends
  • U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers
  • OPEC has hinted at its desire to limit production in face of the prolonged low oil environment
  • OPEC members have been reluctant to pare production even though oil prices remain low relative to the standards set in recent years

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has been on a torrid pace in recent weeks and an overlooked catalyst may be one of the reasons why: Favorable seasonality.

“U.S. production reached a peak of 9.6 million barrels a day in April 2015, six months after OPEC moved to a market-based strategy that sent prices skidding. U.S. oil output was lifted by the industry’s recently completed projects, and production was also supported by hedging, ready financing and technology gains. But financing is no longer easy, and some producers face real hardship, including fire sales or bankruptcy,” according to CNBC.

The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.

OPEC has hinted at its desire to limit production in face of the prolonged low oil environment. However, Iran, which has just recently re-entered the global oil market, is only just starting to ramp up production, potentially putting a damper on plans for a OPEC cut.

In addition to Iran, other OPEC members have been reluctant to pare production even though oil prices remain low relative to the standards set in recent years. Still, seasonality should not be dismissed.

“Kicking things off with Crude Oil, what a move we have seen from the low of $26, which was a level not seen since May 2003. Friday finished off the highs, but it was still good enough for the highest daily close since December 4 of last year. The $38-38.50 area appears to be very important for the near-term future of Crude. It has seen inflections at this level in the last several months,” according to See It Market.

Several OPEC members and Russia, the largest non-OPEC member, have been mulling production cuts, but without Saudi Arabia taking the lead on that front, oil could still face output issues. Notably, oil volatility has been waning.

“What is interesting is the dramatic decline in the Oil Volatility Index as measured by OVX (which measures the implied volatility on the USO oil ETF, not Crude Oil itself). OVX spiked to above 81 in February, which was the highest mark since early 2009 during the financial crisis and commodity bust. OVX has since fallen all the way back to 50, which implies about a 14.5% expected move over the course of the next month. The 50 level marks trendline support for OVX, so this would potentially be a bearish indicator for Crude Oil should OVX hold the support line,” adds See It Market.

United States Oil Fund