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, are each up just over 1% over the past month and the oil futures could be signaling more gains to come for the commodity.
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.
However, some market observers believe the $60 per barrel level will be a tough mountain to climb for oil futures.
“More recently, the time spreads for Brent futures also indicate increasing tightness in the market. John Kemp of Reuters notes that the spread between futures between April and May has sharply narrowed this month, meaning that the market is betting on a supply deficit as we move into the second quarter,” reports OilPrice.com. “The spreads for May-June and June-July are even smaller, trading at a few cents per barrel. This is a complicated way of saying that there isn’t a way to make money by buying oil, paying for storage, and selling it at a later date.”
Of course, the Organization of Petroleum Exporting Countries (OPEC) figures prominently in the equation. 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.
However, as just one example, Iraq violated its production quota last month, underscoring the potential that some OPEC simply will not abide by new production guidelines.
“Traders are more and more confident that the oil market will experience tighter conditions as we move into the second quarter, a bet that is reflected in both the time spreads and the exceptional buildup in bullish positions on crude oil,” according to OilPrice.
For more information on the crude oil market, visit our oil category.