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, are down an average of 2.3% over the past week as some traders are increasingly concerned about the impact of rising U.S. shale output on oil prices.
Expanding U.S. stockpiles could depress further gains in the crude oil market. Inventories in U.S. tanks and terminals likely increased by 3 million barrels last week, potentially marking the fourth straight week of gains and the longest expansion since the first quarter of 2017, Bloomberg reports.
Increased U.S. oil output “is likely to take prices back below USD60/bbl, and that shale’s ability to meet a significant portion of global demand growth will keep prices in the USD50-60/bbl range over the long term,” said Fitch Ratings in a note out Wednesday.
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.
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. The U.S. is expected to pass Russia this year as the world’s largest oil producer.
“We have raised our base-case average price assumptions to USD57.5/bbl (Brent) and USD55/bbl (WTI) for this year and next, an increase of USD5/bbl for 2018 and USD2.5/bbl for 2019. These are also our forecasts for 2020 and beyond. The stronger near-term price outlook reflects the success of OPEC-plus in reducing excess stock, and our expectation that compliance with the agreement will remain fairly strong in 2018,” according to Fitch.
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.
The energy industry has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to improve revenue at lower oil prices.
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