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Oil Prices Retreat on Worries of Weak Global Demand Growth

This article was originally published on ETFTrends.com.

Oil prices retreated as much as 2 percent on Friday after weak data from the Institute for Supply Management (ISM) stoked fears of weak global demand growth.

The ISM Manufacturing Index, which measures U.S. manufacturing activity, reached its lowest level in over two years and expanded at a slower-than-expected pace during the month of February.

"We have been the island of prosperity, globally, so if the economic slowdown is coming our way that is bad news for oil prices," said John Kilduff, a partner at Again Capital LLC in New York. "We were up all morning until that data hit," he said.

Economists polled by Refinitiv expected the ISM Manufacturing index to fall to 55.5, but the final number came in at 54.2 for February versus 56.6 for January. The index level represents its lowest since November 2016.

Based on the latest ISM data, a decline in new orders, production, employment and prices all brought down the index.

"I think the market is nervous, and when they got the data, they reacted," said Phil Flynn, an analyst at Price Futures Group in Chicago.

Despite the data, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH) was up 4.13 percent.

Short-Term Bullishness Ahead?

Oil prices faced downward pressure last week when U.S. President Donald Trump's tweet on high oil prices took aim at the Organization of the Petroleum Exporting Countries (OPEC) and sent crude down as much as 3 percent.

Oil dropped as much as 40 percent during the fourth quarter of 2018, but Saudi Arabia pared back its production near the end of the year. Additionally, supply disruptions came about after the Trump administration blocked oil shipments to and from Venezuela as the country faces tenuous political stability.

In December, lengthy Organization of the Petroleum Exporting Countries (OPEC) discussions finally came to a conclusion, resulting in a larger-than-expected production cut. OPEC and associated partners agreed to cut 1.2 million barrels per day with OPEC being responsible for 800,000 barrels.

According to global investment firm Goldman Sachs, more bullishness could be ahead for oil prices in the near-term before an eventual ceiling spurred by a "New Oil Order" puts a cap on price spikes.

"While prices could easily trade in a $70-$75/bbl trading range, we believe such an environment would likely prove fleeting," according to Goldman's global head of commodities research Jeffrey Currie and senior commodity strategist Damien Courvalin. "As a result, we would view near-term strength as a window of opportunity for producers to sell forward prices to create earnings security before the return of the New Oil Order later this year."

For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.

Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.

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