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, have each lost more than two percent since the start of 2017 as some oil traders have doubted the impact of supply reductions by major oil-producing nations.
Previously, OPEC said it plans to diminish output to a range of 32.5 to 33.0 million barrels per day from its current estimated output of 33.24 million barrels per day. Saudi Arabia, the cartel’s largest producer, is making good on efforts to lower output.
Some oil traders believe 2017 will be fertile ground for an oil rally. 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.
Declining production in China, one of the world’s largest oil consumers, could be a catalyst for ETFs such as BNO and USO.
“However, the collapse of crude oil prices has forced Chinese oil production into a state of decline. Many of China’s oil fields are old, mature and require heavy investment to stave of depletion. The market meltdown for crude oil beginning in 2014 forced China’s state-owned companies to take a hard look at whether or not pumping money into their older fields was still a worthy investment,” reports OilPrice.com.
Eleven other major oil-producing countries that are not OPEC members, including Russia, have also vowed to trim output. Russia is the largest non-OPEC producer, making its production reduction efforts a significant part of oil’s recent resurgence.
Other major oil-producing nations that are not OPEC members but are pledging to curb production include Bahrain, Bolivia, Brunei, Equatorial Guinea, Malaysia, Sudan and South Sudan.
In addition to China, supply from the Asia-Pacific region is expected to fall over the next several years due to poor oil infrastructure investment.
“The supply problem is larger than just China. Across the entire Asia-Pacific, oil supply will fall in the coming years as upstream investment has suffered from the collapse of oil prices and new exploration tends to be focused on natural gas,” according to OilPrice.com.
For more information on the crude oil market, visit our oil category.