Why Investors are Bearish on Oil ETFs

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 up an average of more than 28% over the past three months. That still is not enough to impress all oil market participants.

In fact, some oil market observers are worried that the commodity is vulnerable to some retrenchment that could send it below $40 per barrel. There are plenty of factors to consider before coming to the conclusion that oil and the related exchange traded products are completely out of the woods. Earlier this month, Saudi Arabia and Iran failed to find common ground during the oil freeze talks in Doha, Qatar.

Related: Oil ETFs: Buying the Dip With USO, BNO

Prices have retreated more than 5% since touching a 2016 high last week as traders questioned the ongoing strength in the oil rally. Energy prices bounced from the February lows on some global supply problems and expectations of a dip in U.S. output.

However, plenty of skeptics remain regarding oil's fundamental outlook. There might be something to that skepticism as many of the world's major ex-U.S. producers of oil have not displayed a willingness to pare production. Even the output reductions in the U.S. have been modest. The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.

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" However, speculation can boost prices only to a certain extent in the short-term. After this, the fundamentals take over. The extent of speculation is enormous, though the daily production of oil in the U.S. is around 9 million b/d, the WTI crude oil contract trades more than 100 times the produced quantity," reports OilPrice.com .

Making oil's rebound rebound this year all the more impressive is that it comes against the backdrop of still low oil prices , little help in the way of significant production cuts and massive spending reductions by global oil majors.

Related: 32 Best ETFs to Track Crude Oil

Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects. Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations.

"However, Citi Research points out that the oil producers have hedged only 36 percent of their estimated production for 2016, compared to 50 percent in the previous years," adds Oilprice.com.

For more information on the oil market, visit ouroil category .

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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