Investors: Don't Overreact to Bearish Oil Calls

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 retreated a bit in recent days amid calls that new supply is coming online. That is stoking speculation that oil futures could fall below $40 per barrel, but investors should be careful before getting too bearish on crude.

Looking at the futures market, the one-year price contango – where neat-term contracts are cheaper those a year ahead, on crude oil has almost doubled, signaling that demand from buyers like refiners could be weakening, reports Grant Smith for Bloomberg.

Related: A Factor that Could Hinder Oil ETF Investing

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.

“While we aren’t in the camp arguing for +$60 oil in 2016 based on the above trends, we do see trending market balance as limiting the downside risk for oil and would most likely look to own 35-25 delta $5-$10 wide call spreads with 4Q16 maturity, sell $35-$30 puts or own WTI structure such as WTI Z16/Z17 if an FX driven sub $40 crude oil move materializes in the coming weeks,” said SCS OTC Corp. in a post on