A Cautionary Sign For Oil ETFs

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, were among the best-performing commodities exchange traded products in the first half of 2018, but after some big gains, oil could face challenges.

Concerns over rising supply, notably out of the Organization of Petroleum Exporting Countries, put a damper on recent gains. Recently, Saudi Arabia stated its willingness to use spare production capacity to raise global supply. President Donald Trump has already called on foreign producers to raise supply to help curb rising prices.

“Goldman Sachs last week once again took the opportunity to espouse its bullish view on black gold. The investment bank thinks ‘the dollar will likely weaken from here,’ and said any impact from Chinese tariffs on U.S. crude exports will be quickly absorbed by the market,” according to Schaeffer’s Investment Research.

Cartel Clues

Since 2016, OPEC and a number of other major oil prices like Russia have been in a concerted effort to cut 2% of the global crude supply in an attempt to diminish the global supply glut and stabilize crude prices. Analysts now project the oil market could move into a deficit in the second part of 2018 and 2019 of 0.5 million barrels and later 0.3 million barrels per day as demand begins to outpace supply.

“With crude oil having gained in the neighborhood of 66% over the last 52 weeks, data from Schaeffer’s Senior Quantitative Analyst Chris Prybal throws some cold water on the bull case for oil. Looking back to 1978, Prybal found that in the 35 instances where crude oil was up by 50% or more on a year-over-year (YoY) basis, the commodity went on to underperform its historical average returns,” reports Schaeffer’s.