Oil and the related exchange traded products, such as the United States Oil Fund (NYSEArca:USO), which tracks West Texas Intermediate crude oil futures, snapped a lengthy winning streak Wednesday on news that Russia is opposed to further deeper output cuts.
That news pressured the already downtrodden energy sector ETFs such as the Energy Select Sector SPDR (NYSEArca:XLE) and the iShares U.S. Energy ETF (NYSEArca:IYE). 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. Global energy ETFs are struggling, too.
“Oil prices rose after an Organization of Petroleum Exporting Countries (OPEC) deal in November sparked optimism that production cuts would help bring supply and demand into balance. Higher-than-expected supply and weak demand then dashed these hopes. This was evident in more speculative bets on falling prices,” said BlackRock in a note out Wednesday.
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.
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Last year, OPEC and other major oil-producing countries agreed to pare output to support prices, but the performance of oil futures indicates that move is not having the desired impact. Additionally, global oil supplies remain elevated, but there are some indications those supplies could decline a bit in the second half of the year. Oil supplies “will decline by about 1 million barrels a day in the second half, Citigroup Inc.’s Head of Commodities Research Ed Morse said in a report,” reports Bloomberg.
“The global oil supply glut hasn’t eased as fast as we thought it would, but we expect to see a reduction in global oil inventories—and a rebalancing of supply and demand—in the second half of the year. Current OPEC compliance with production cuts is well above the historical average and it typically takes two to three quarters for inventories to reflect such cuts,” according to BlackRock.
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.
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