The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is rebounding and there is an important technical scenario at play that could signal more upside for previously downtrodden crude prices.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
“West Texas Intermediate crude oil just posted a ‘golden cross,’ a technical formation that occurs when an asset’s shorter-term moving average crosses over its longer-term moving average. In this case, crude oil’s 50-day moving average crossed over its 200-day moving average,” reports CNBC.
Oil traders should be aware that the holdings of ETFs like USO’s underlying portfolio includes front-month WTI future contracts, and the oil futures market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract for next month’s contract.
For its part, OPEC remains concerned about the level of production by U.S. shale producers and the cartel is urging its U.S. rivals to pare output to support prices. According to the Energy Information Administration, crude oil product could hit 9.9 million barrels per day in 2018, which surpasses the prior high reached in 1970 of 9.6 million barrels per day.
“Adding to his bullish outlook is the backwardation seen in the oil market, which occurs when a future contract’s price trades below the current spot price. This signals tightening in the supply, Bill Baruch, president of Blue Line Futures said in an interview with CNBC, and is also an encouraging sign.”
Related: Be Careful With Imminent Oil Catalyst
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.
Additionally, the ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF) tries to provide long-term capital appreciation designed to exceed the performance of the Bloomberg Energy Index 3 Month Forward Index, which tracks movements in the prices of rolling positions in a basket of energy commodity futures with a maturity between 4 and 6 months.
For more news on oil ETFs, visit our oil category.