While the Organization of Petroleum Exporting Countries has taken steps to rein in the global supply glut, greater production out of U.S. shale could cap gains in crude oil prices and related exchange traded funds.
“U.S. oil production may hit an all-time high in 2018 despite prices at half of 2014 levels,” Nitesh Shah, Director of Commodity Strategist at ETF Securities, and Maxwell Gold, Director of Investment Strategy at ETF Securities, said in a note, pointing to expansions in shale oil from the Permian Basin and rising efficiency in off-shore oil in the Gulf of Mexico.
According to the Energy Information Administration, crude oil product could hit 9.9 million barrels per day in 2018, which surpasses the prior high reached in 1970 of 9.6 million barrels per day.
The Permian Basin will be a key factor in the growth of U.S. oil production. Of the 940 oil rigs in operation, about 377 are in the Permian Basin. Many oil producers have also decided to drill but not complete wells in the region due to minor transportation constraints, which leaves a lot of untapped potential on the ground.
Furthermore, oil production in the Gulf of Mexico has been rapidly expanding despite weaker prices, with production out of the gulf already touching an annual high back in 2016, which surpassed the previous high in 2009. Off-shore oil production is also experiencing greater efficiency as cost reductions, standardization and simplification have benefited drillers as well.
“We believe that oil will trade in a range between US$40-55/barrel (bbl) over the coming year,” the ETF Securities strategists said.
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West Texas Intermediate crude oil futures are currently trading around $49.9 per barrel while Brent crude oil futures are at $55.7 per barrel.
To gain exposure to the oil markets, ETF investors have a number of futures-related oil ETF options to choose from. For instance, 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, have been popular plays on the oil market.
Additionally, the ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF) tries to provide long-term capital appreciation designed to exceed the performance of the Bloomberg Energy Index 3 Month Forward Index, which tracks movements in the prices of rolling positions in a basket of energy commodity futures with a maturity between 4 and 6 months.
For more information on the crude oil market, visit our oil category.