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, tumbled last week as markets reconciled that U.S. shale production is surging. However, some market observers believe oil prices can rebound even as U.S. oil output climbs to multi-decade highs.
For its part, OPEC remains concerned about the level of production by U.S. shale producers and the cartel is urging its U.S. rivals to pare output to support prices. Late last year, U.S. output topped 10 million barrels per day for the first time since 1970 and that figure is expected to continue rising before reaching 11 million barrels per day in late 2019.
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 prompt more upside for oil this year.
“First, the EIA dramatically overhauled its forecasts, predicting U.S. oil production would hit 11 million barrels per day (mb/d) this year, rather than late next year,” reports OilPrice.com. “Then, on Wednesday, it revealed estimates that put U.S. oil production at 10.25 mb/d for the week ending on February 2, a staggering 330,000 bpd increase from a week earlier. Those weekly estimates are subject to revision when more data becomes available, but if those figures hold, it would point to a significant ramp up in drilling activity and new supply coming online.”
In recent months, production declined in OPEC members Saudi Arabia, United Arab Emirates and Venezuela, but output topped a post-Soviet era record in Russia last year. Russia is expected to continue pumping to take advantage of rebounding prices.
“This time around the downward swing could be aided by a rebound in the strength of the dollar,” according to OilPrice.com. “Typically, a weakening dollar pushes up oil prices, and the rapid run up in prices over the last few months occurred not coincidentally at a time when the dollar posted a steep decline. But the greenback has clawed back gains, particularly over the last week, with expectations of rising interest rates.”
The U.S. Dollar Index rose 1.5% last week.
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