Why Investors are Bearish on Oil ETFs

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, are up an average of more than 28% over the past three months. That still is not enough to impress all oil market participants.

In fact, some oil market observers are worried that the commodity is vulnerable to some retrenchment that could send it below $40 per barrel. There are plenty of factors to consider before coming to the conclusion that oil and the related exchange traded products are completely out of the woods. Earlier this month, Saudi Arabia and Iran failed to find common ground during the oil freeze talks in Doha, Qatar.

Related: Oil ETFs: Buying the Dip With USO, BNO

Prices have retreated more than 5% since touching a 2016 high last week as traders questioned the ongoing strength in the oil rally. Energy prices bounced from the February lows on some global supply problems and expectations of a dip in U.S. output.

However, plenty of skeptics remain regarding oil’s fundamental outlook. There might be something to that skepticism as many of the world’s major ex-U.S. producers of oil have not displayed a willingness to pare production. 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.