The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is lower by more than 4% over the past week and the increasing trade hostility between the U.S. and China, the world’s two largest economies, is a big reason why oil is slumping.
Investors considering USO or other oil exchange-traded products have several factors to consider, including the Organization of Petroleum Exporting Countries (OPEC).
The International Energy Agency projects consumption to increase each quarter of 2019 year-over-year, albeit at a slower-than-usual pace for the first quarter. Meanwhile, on the supply side, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have been cutting output. Additionally, U.S. sanctions on Iran and Venezuela have reduced further bets on international supplies.
While OPEC always looms large in the oil market, trade wars are a significant consideration, too.
“Most importantly, higher tariffs are likely to depress economic growth in Asia and the U.S. because they are expected to raise costs for businesses that import goods or result in higher prices for consumer goods, or both,” reports Avi Salzman for Barron’s.
China has already proven its importance on the global oil stage. USO and rival funds slid last month after China reported weaker-than-expected economic data.
U.S. Energy Information Agency Cuts Forecast
Last month, the U.S. Energy Information Agency (EIA) cut its forecasts for 2019 world oil demand growth and U.S. crude production in light of the growing trade tensions between the world’s two largest economies that have crippled economic activity.
“China’s industrial output and retail sales in June, however, trumped analyst expectations, suggesting the state of the industry is not as bad as the gloomiest forecasts had it and oil demand growth could be supported through the end of the year,” according to OilPrice.com.
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That industrial output report may have been the silver lining in the batch of data out of the world’s second-largest economy Monday and could bode well for oil prices over the near-term.
“When economic growth slumps, people and businesses tend to use less energy. And the uncertainty around the resolution of the trade war has impacted purchasing decisions around the world,” according to Barron’s.
China’s currency devaluation effort could make the dollar strong, hampering oil in the process.
“If the dollar gets significantly stronger due to Chinese currency weakness, it could also hurt oil prices, which are denominated in dollars and tend to move inversely to the dollar,” reports Barron’s.
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