Oil exchange traded products, including 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 recently been trying to cobble together some momentum, but at least one price point remains pivotal to oil’s near-term fortunes.
While many oil market observers believe a rise to $60 per barrel is necessary to fan the flames of a broader rally, over the near term, the $50 per barrel is key.
Advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, but the growth rate of U.S. oil product has also recently slowed.
“$50 is considered the bull/bear line and this is where a tug of war comes into play between supply and demand,” said RJO Futures senior market strategist Phillip Streible in an interview with CNBC.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.
“Streible also lays out a bear case, in which production increases in the U.S., as well as in Libya and Nigeria; oil inventories rise as seasonal demand falls off, and the dollar strengthens thanks to expectations of tighter Fed policy,” according to CNBC. “Obviously, crude oil would likely fall below $50 if the full bear case plays out.”
Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
For more news on oil ETFs, visit our oil category.