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 surging. Some data points suggest are traders are betting on more upside for oil.
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 prompt more upside for oil this year.
The expanding global economy has increased demand for commodities and drawn down oil inventories. For instance, according to the Energy Information Administration, U.S. crude stockpiles have declined for the past 10 consecutive weeks and are now at their lowest level since 2015.
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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. Late last year, U.S. output topped 10 million barrels per day for the first time since 1970 and that figure is expected to continue rising before reaching 11 million barrels per day in late 2019.
What Oil Traders Are Doing
“The last time oil options traders were this bullish, crude was selling for $105 a barrel,” reports Bloomberg. “Geopolitics returned to the market: A thwarted missile attack in Riyadh, Saudi Arabia, and U.S. President Donald Trump’s threats to launch missiles at Syria drove futures prices in New York to a three-year high.”
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Some traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
“The call skew in West Texas Intermediate crude, which measures how much more investors are willing to pay for calls than for puts, jumped Wednesday to the highest level since June 30, 2014,” according to Bloomberg.
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