The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and rival oil exchange traded products have recently been showing signs of life, but oil futures still have a lot of work to do to reach price points that will truly excite financial markets.
Advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, but the growth rate of U.S. oil production has also recently slowed.
“Lower global production costs, considerable U.S. shale growth potential and shale’s ability to quickly respond to changing market conditions should keep average annual oil prices below USD60 a barrel in the long term,” said Fitch Ratings. “But oil prices will remain volatile and could periodically exceed our assumptions.”
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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Declining production in China, one of the world’s largest oil consumers, could be a catalyst for ETFs such as USO. In addition to China, supply from the Asia-Pacific region is expected to fall over the next several years due to poor oil infrastructure investment.
“The land rig count in the U.S. lower 48 has risen around 45% since the end of 2016, contributing to a rebound in U.S. crude production to over 9.5 million barrels a day (mmbbl/d) from a trough of about 8.4 mmbbl/d in July 2016. We continue to expect U.S. production growth to remain robust in the second half of 2017 based on the roughly two- to four-month lag between spudding shale wells and production,” according to Fitch.
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.
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