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, enjoyed impressive first-quarter performances, gaining an average of 7.75%, but some market observers believe crude can rally again.
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.
“Ongoing declines in Venezuela and concerns about heightened tension between the U.S. and Iran have significantly raised the risk premium for oil, even as some short-term factors recently pushed up prices,” reports OilPrice.com.
Still, U.S. oil output is surging and resides near record highs.
U.S. Output High, But Not Dominating The Market
“U.S. production is indeed soaring, but it doesn’t appear to be swamping the market, at least as of now,” according to OilPrice.com. “A variety of analysts have argued that oil demand is so strong that the market will continue to tighten, even after considering the explosive growth of U.S. shale.”
The expanding global economy has increased demand for commodities and drawn down oil inventories. For instance, according to the Energy Information Administration, U.S. crude stockpiles have declined for the past 10 consecutive weeks and are now at their lowest level since 2015.
Related: Second Quarter Could be Rough on Energy ETFs
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.
“While these short-term factors no doubt played a role in pushing up crude benchmarks, they are occurring against a backdrop of a tighter oil market. The surplus of OECD inventories is now below 50 million barrels, whereas it was above 300 million barrels a year ago,” according to OilPrice.com.
For more information on the oil market, visit our oil category.