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 15% this year and that is enough for some analysts to call for near-term downside for crude.
The International Energy Agency (IEA) projects oil stocks to expand by 1.5 million barrels per day in the first six months of 2016 and then slow to 200,000 barrel per day in the second half of the year due to a drop in high-cost production, like U.S. shale oil.
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Meanwhile, some of the world’s largest producers continue to pump crude at record levels, with the Organization of Petroleum Exporting Countries maintaining Saudi Arabia’s strategy of squeezing out high-cost competitors.
“While oil did recover on Wednesday, the general trend has been downward since oil hit above $50 last week. Strategas technical analyst Chris Verrone believes the downtrend is here to stay, especially given the risk associated with crude stocks,” reports CNBC.
[related_stories]Last week, oil ETFs stumbled after the Organization of Petroleum Exporting Countries failed to agree on a production ceiling, with Iran planning to pump out more crude.
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Saudi Arabia previously said it would join a production freeze deal if Iran agreed to curb output. However, Tehran has maintained that it should be allowed to raise production to previous levels before the introduction of Western sanctions over Iran’s nuclear program, instead arguing for individual-country production quotas.
Consequently, market observers believe that the failure of a deal reflects political differences that are undermining the organization, notably between the Sunni-led kingdom and the Shi’ite Islamic Republic.
“Verrone also points to a long-term chart of oil that shows that crude is being “stretched” over its 200-day moving average, a smoothing mechanism which he believes will be “rechallenged” to the downside for oil,” according to CNBC.
Bearish oil ETFs include the VelocityShares 3x Inverse Crude (NYSEArca: DWTI), United States Short Oil (NYSEArca: DNO) and the DB Crude Oil Short ETN (NYSEArca: SZO).
For more information on the oil market, visit our oil category.
United States Oil Fund
