Why Oil ETFs Can Bounce Back

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is lower by more than 7% over the past week, but some oil market observers believe crude can bounce back.

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.

“The spread between West Texas Intermediate and Brent crude futures prices has widened to new extremes recently, and this is a bullish development,” reports CNBC. “The spread has reached more than $11, the largest since mid-2015. WTI is trading a little over $65 per barrel, while European Brent crude, the international benchmark for oil, is trading near $76.”

Market Risks

Since 2016, OPEC and a number of other major oil prices like Russia have been in a concerted effort to cut 2% of the global crude supply in an attempt to diminish the global supply glut and stabilize crude prices. Analysts now project the oil market could move into a deficit in the second part of 2018 and 2019 of 0.5 million barrels and later 0.3 million barrels per day as demand begins to outpace supply.

Related: Energy ETFs Plunge as OPEC Looks to Higher Production