The United States Oil Fund (NYSEArca: USO) , which tracks West Texas Intermediate crude oil futures, was pummeled in the fourth quarter. The benchmark oil exchange traded product slid 37.76% in the last three months of 2018 on its way to a yearly loss of 19.57%.
Oil prices have been steadily on the decline and are off by over 40% since the October highs, despite an agreement earlier in December between the Organization of Petroleum Exporting Countries and its allies like Russia to cut a combined 1.2 million barrels per day from the market in 2019, the Wall Street Journal reports.
Still, some market observers see upside potential for oil to start the new year and some of that bull thesis lies with OPEC.
“To start with, the OPEC+ cuts take effect at the start of January, and in reality, even if the group does not reach the promised 1.2 million barrels per day (mb/d) right away this week (it surely won’t), the reductions have been likely underway for some weeks,” reports OilPrice.com. “By some counts, OPEC production fell more than 800,000 bpd in December, most of which came from Saudi Arabia.”
New Year, Better Returns?
USO resides nearly 29% below its 200-day moving average and just 4.66% above its 52-week low.
Late in 2018, crude was also caught up on the general risk-off market sentiment as the U.S. government shutdown, rising interest rates and the trade war between the U.S. and China rocked the markets and exacerbated concerns over global growth.
“The second reason that the oil market may have bottomed out is that the waivers on Iran sanctions are set to expire in May,” according to OilPrice.com. “The latest data from Reuters shows that the volume of imports by Asian countries of Iranian crude hit a low in December at 664,800 bpd, down 12.7 percent from a year earlier. However, countries such as South Korea and Japan have indicated that, with waivers from the U.S. Treasury in hand, they could buy more oil from Iran beginning in January.”
There are expectations that U.S. shale production could grow by 1.2 million barrels per day this year, but if that number is missed it could act as a de facto production cut, potentially helping oil prices along the way.
On Wednesday, Direxion Daily S&P Oil & Gas Exploration & Production Bull 3X ETF (NYSEArca: GUSH) rose 5 percent on rising oil prices despite lingering concerns over rising production and a weakening global economy.
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