Markets

Even with Production Freeze, Keep Oil ETF Expectations Grounded

Despite plans for a production freeze among Organization of Petroleum Exporting Countries (OPEC) and other global producers, oil exchange traded fund investors shouldn't get their hopes up for a continued surge in crude oil prices after the recent run up.

Over the past three months, the United States Oil Fund (NYSEArca: USO ) , which tracks West Texas Intermediate crude oil futures, jumped 15.6% and the United States Brent Oil Fund (NYSEArca: BNO ) , which tracks Brent crude oil futures, surged 36.2%.

WTI crude oil futures are now trading around $41.7 per barrel while Brent crude futures were at $44.1 per barrel.

Oil prices have been recovering off a 13-year low in February on speculation of a production freeze among the largest oil producers in the world. Recent reports also indicated that Saudi Arabia and Russia are moving forward with a production freeze. Market observers will watch for the impact from a finalized accord in Doha, Qatar this weekend.

However, the International Energy Agency argues that the proposed deal is more about influencing market psychology than diminishing a global supply glut, the Financial Times reports.

"If there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited," the IEA said on Thursday, noting Saudi Arabia and Russia were already producing at or near record rates.

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Consequently, without a commitment to actually cut oil production, which Saudi Arabia's oil minister Ali al-Naimi has ruled out, the IEA argued that the world will likely continue to pump out more oil than it is ready to consumer throughout 2016, even after the "much-anticipated" decline in U.S. shale oil production.

Specifically, the IEA projects oil stocks to expand by 1.5 million barrels per day in the first six months of 2016 and then slow to 200,000 barrel per day in the second half of the year due to a drop in high-cost production, like U.S. shale oil.

The agency also added that a "tighter" supply and demand balance was already being reflected in prices.

Moreover, the IEA has warned that it may even lower oil demand forecasts amid slowing economic activity, which seems more likely after the International Monetary Fund already cut its global economic outlook. For now, the IEA has not made significant revisions to its demand forecasts in light of the recent IMF growth projections.

United States Oil Fund

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article was provided by our partner Tom Lydon of etftrends.com.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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