The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), have recently been pulling back, but retreating oil prices could give astute investors an opportunity to get involved before the commodity’s next move higher.
As is usually the case, supply and demand remains a key issue for oil markets and the related exchange traded products. Production is declining in some places, but is rising in others.
For example, Venezuela’s output is at multi-year lows. However, supply is coming back online in Nigeria and Algeria is expected to ramp up output. All three countries are OPEC members.
[related_stories]Some concerned oil market participants believe oil is rallying without strong fundamental cause. A case can be made that oil’s rally is defying still troubling supply dynamics and tepid demand.
Elevated levels of production remain an issue for oil as well. 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.
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Still, some oil market observes see encouraging signs on the commodity’s charts.
“Craig Johnson, senior technical market strategist at Piper Jaffray, sees crude prices going as high as $75 per barrel in about a year based on a long-term chart of oil. Johnson’s chart shows an inverse head and shoulders has formed, a pattern that is generally thought to predict an uptrend. This, coupled with crude breaking above a diagonal neckline, makes Johnson bullish on oil,” reports CNBC.
Contango does speak to a potentially over-supplied market, but there are diverging views among market participants about where crude goes from here.
While production has declined in the U.S., recently rebounding oil prices are encouraging exploration and production companies to revisit spending plans with some increasing capital expenditures. That has some oil market observers concerned about a rising rig count and the subsequent impact on crude prices.
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Some analysts don’t see much near-term upside in store for the energy sector, which has been one of this year’s best-performing groups.
“While Erin Gibbs, equity chief investment officer at S&P Global, isn’t as bearish on oil, she does believe the energy sector in general may not be headed anywhere even in the long term,” according to CNBC.
United States Oil Fund
