The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is lower by 3% over the past week as markets view oil prices as stuck in neutral for the time being. However, some commodities traders are looking to reduced supply as a potential catalyst for downtrodden oil, one of this year’s worst-performing commodities.
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.
“But a lot of the assumptions regarding an ongoing state of oversupply are based on the swift return of U.S. shale, plus rising production from Libya and Nigeria, all of which will roughly offset the production cuts made by the rest of OPEC,” reports OilPrice.com. “’The rising rig count in the U.S. will lead to more production, it is assumed, “casting doubt on rebalancing efforts,’ JBC Energy said.”
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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While U.S. shale producers previously continued pumping in the face of low prices, the industry has recently revealed a spate of capital spending reductions, indicating still low crude prices are taking a toll. Low oil prices are also prompting speculation about credit downgrades for some exploration and production firms that already carry junk credit ratings.
“In the Permian, there have been some troubling reports in recent weeks that shale drillers are slowing down and having problems with their existing wells,” according to OilPrice.com. “The decline rate is acceleratingand some wells are producing a higher gas-to-oil ratio than expected. Pioneer Natural Resources’ disappointing figures from the second quarter have sparked some concern that the Permian might not live up to the hype.”
International Energy Agency data revealed China imported 8.55 million barrels per day of oil in the first half of the year, or up 13.8% year-over-year, which has made the emerging economy the largest crude importer, even ahead of the U.S.
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