Despite production cuts out of the Organization of Petroleum Exporting Countries and other major crude exporters, oil and energy-related exchange traded funds continue to weaken as U.S. shale oil producers pick up the slack.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, fell 2.1% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, dropped 1.9% Tuesday as WTI crude oil futures slipped to $52.0 per barrel and Brent crude dipped to $54.9 per barrel.
Meanwhile, the Energy Select Sector SPDR (NYSEArca: XLE) was down 1.6% Tuesday, with laggards including PowerShares DWA Energy Momentum Portfolio (NasdaqGM: PXI) down 3.1%, iShares U.S. Oil & Gas Exploration & Production ETF (NYSEArca: IEO) down 2.5% and SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) down 2.7%.
Crude oil prices continued to weaken on speculation of a revival in U.S. shale production that has undermined the support from production cuts out of OPEC and other major exporters.
“The general perception is that OPEC is cutting production, which is supporting prices, but high stock levels, rising rig counts and growing U.S. production are capping gains,” Tamas Varga, analyst at London brokerage PVM Oil Associates, told Reuters.
OPEC and Russia have in all cut at least 1.1 million barrels per day in production so far. However, Societe Generale oil analyst Michael Wittner said U.S. shale output was rebounding faster than expected as more rigs drilled better and more efficient wells more quickly.
“Rig counts are increasing at an accelerating pace, and given the technological advances of the past three years, this should translate into significant supply,” Wittner told Reuters. “U.S. shale is coming back, and it’s coming back strong.”
Additionally, a strengthening U.S. dollar is also weighing on crude oil prices – oil is priced in dollars and becomes more expensive for foreign buyers as the USD appreciates against their currencies.
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