Oil exchange traded products, including 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, are receiving renewed attention thanks to geopolitical tensions in Iraq, but neighboring Iran could be a threat to global supplies.
Both Iran and Iraq are members of the Organization of Petroleum Exporting Countries (OPEC). 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 at least keep oil prices steady around current levels in the second half of 2017.
“While the Kurdistan-Iraq standoff is a risk to shorter-term oil production, the increased tensions between neighboring Iran and the U.S. are a longer-term and bigger threat to global oil supplies, according to Goldman Sachs,” reports OilPrice.com.
While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
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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.
“On Friday, U.S. President Donald Trump said he was officially withdrawing his certification of Iranian compliance with the nuclear deal, in what is being billed as part of a tougher strategy on Iran,” according to Oil Price.com. “President Trump passed the nuclear deal back to Congress to review and amend the law. If no other countries support the U.S. push for more sanctions, Iran’s production is unlikely to drop by 1 million bpd, according to Goldman.”
Investors have added nearly $65 million to USO since the start of the fourth quarter.
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