The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, gained 5.2% and the United States Brent Oil Fund (NYSEArca: BNO), are two of this year’s best-performing commodities exchange traded products though the pair, along with other oil ETPs, have scuffled in recent days.
Some market observers, citing supply and demand dynamics, 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.
Related: Oil ETFs at 7 Month High on Falling U.S. Inventories
Of course, some oil market observers hold alternative views, contending that oil’s recent rally is still in the early innings and that a new bull market for the commodity is being born.
“Unlike last year, when commodity markets rallied through the second quarter only to fall sharply come the third as oversupply persisted, this rally looks more sustainable as physical markets have tightened considerably,” according to a Citigroup note posted by OilPrice.com. “Global demand continues to grow at a moderate rate while the pullback in capital spending is reducing not just supply growth but total supplies across nearly all extractive industries.”
[related_stories]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.
Goldman Sachs Group recently warned in a note that China, the world’s second-largest oil consumer and a major driver for global growth, will be trying to ward of another yuan devaluation as investors turn to the USD or Japanese yen and other safe-haven assets, according to the Wall Street Journal.
Related: A Very Bullish Call for Oil ETFs
“The latest data from the EIA shows that output fell by 194,000 barrels per day for the week ending on July 1. Weekly estimates are not always the most accurate, but the decline is surprisingly large. If true, U.S. oil production is down 1.2 million barrels per day from the April 2015 peak, with more declines expected,” according to OilPrice.com.
United States Oil Fund
