ETF Trends
ETF Trends

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 traded modestly lower to start 2017.

While there are not many oil market observers calling for substantial near-term declines, some crude traders believe near-term gains for the commodity will be hard to come by as well.

Declining production in China, one of the world’s largest oil consumers, could be a catalyst for ETFs such as BNO and USO. 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.

However, oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.

“Not much has changed in the market over the past week regarding fundamentals, although another week of EIA data continues to indicate rising activity in the U.S. shale patch, with production figures, crude stocks and gasoline stocks all on the rise. Oil production in the U.S., at least according to weekly surveys, is now just slightly below the 9 million barrel per day mark, a level that it has not hit since March of last year,” according to OilPrice.com.

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.

As usual, politics will play a part in charting oil’s price action.

“The border tax would have enormous implications for the energy trade between the U.S. and Mexico, a relationship that has grown in recent years, much to the benefit of U.S. exporters. Problems with refineries in Mexico have led to a surge in imports of U.S. refined products. A growing economy has Mexico in need of U.S. natural gas as well. The border tax would disrupt much of this. The White House seemed to back off the plan after a public outcry, but it is unclear what avenue the administration will pursue,” reports OilPrice.

OPEC has already agreed to reduce output by 1.2 million barrels per day. After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply.

For more information on the crude oil market, visit our oil category.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.