After a breathtaking rally that recently saw it sporting a double-digit one-month gain, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is pulling back as highlighted by a loss of nearly 7% over the past week.
That has stoked ample concern that crude prices rallied too rapidly, but oil’s recent pullback is also opening the door for some bullish traders to get back in the game. Even the output reductions in the U.S. have been modest. The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.
Traders could be acknowledging the fact that although oil prices have surged, there has been little in the way of dramatic production cuts to fuel a more sustained rally for crude futures. Conversely, other market participants appear to be focusing on near-term price action above longer-term fundamentals.
“Hedge funds have more than doubled their net long position from just 242 million barrels at the end of last year, according to an analysis of data published by regulators and exchanges,” reports Reuters. “The net long position has passed the previous peak of 572 million barrels, set in May 2015, and is closing in on the record of 626 million, set in June 2014, when Islamic State fighters were racing across northern Iraq.”
Qatar, Russia, Saudi Arabia and Venezuela have been in discussions to hold output steady at January levels, but only if other producers followed suit. Russia is the largest non-OPEC producer of oil and natural gas, though the country prefers higher prices even more so than Saudi Arabia.