The United States Oil Fund (USO) , which tracks West Texas Intermediate crude oil futures, and the the United States Brent Oil Fund (BNO) , which tracks Brent crude oil futures, are among this year’s standout commodities exchange traded products, but some energy market observers believe crude is ready to retreat.
U.S. crude oil inventories are still near their highest level in mover 80 years, reflecting the ongoing global supply glut that has pressured prices since 2014. Energy stockpiles typically recede at this time of the year as refineries complete seasonal maintenance and process oil into refined products, like gasoline.
Earlier this week, oil ETFs strengthened after Goldman Sachs analysts Damien Courvalin and Jeffrey Currie said that a decline in production due to unexpected disruptions, along with sustained demand, have created a “sudden halt” to the output surplus, reports Serene Cheong for Bloomberg. The shifting outlook that supply losses are leading to a rebalance was also mirrored by Morgan Stanley, Barclays Plc and Bank of America Corp.
A number of factors are weighing on the global crude oil supply chain, including wildfires in Canada that disrupted major oil sands production in Alberta, pipeline attacks in Nigeria and outages in Venezuela. Consequently, Goldman projects production will remain below demand through the second half of the year.
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Meanwhile, the bank believes global demand will grow by 1.4 million barrels a day in 2016, compared to 1.2 million predicted previously.
Still, the total oil picture is not perfectly sanguine.
“The market will likely be seeing more overall output from OPEC, in the months ahead. Saudi Arabia has stated its ability and intention to raise output to 11.5 million barrels per day, which would represent a 1 million barrel-per-day increase, from current levels, mostly to satisfy its summertime, internal demand. And that is significant,” writes John Kilduff for CNBC.
Related: 32 Best ETFs to Track Crude Oil
In the CNBC piece, Kilduff said it is possible oil prices retest $35 per barrel. West Texas Intermediate closed at $48.54 per barrel Wednesday.
Goldman warned that a return of some output and higher-than-expected volumes from the U.S., the North Sea, Iraq and Iran could mean that the shortfall will be 400,000 barrels a day rather than the 900,000 previously predicted, and the bank expects a return to surplus in early 2017. It cut its forecast for the first quarter of 2017 to $45 from $55, but sees oil at $60 by the end of that year.
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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.