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Poor Fundamentals Drag Down Oil ETFs


Uncertainty and geopolitical risks on the Ukrainian and Russian border, violence in the Gaza strip and Iraq’s sectarian civil war should be pressuring oil’s supply outlook  However, soft oil demand has dampened on oil prices and related exchange traded funds.

The United States Brent Oil Fund (BNO) decreased 2.1% Thursday and touched a 13-month intra-day low Wednesday. Meanwhile, the United States Oil Fund (USO) , which tracks West Texas Intermediate oil futures, fell 1.9% Thursday and is now trading about 0.2% below its 200-day simple moving average.

Brent crud oil futures were hovering around $102.2 per barrel and WTI crude oil was trading at $96.1 per barrel on Thursday.

Oil futures took a hit earlier this week after the International Energy Agency projected lower oil demand for 2014, pointing to lower-than-expected second quarter growth in developed economies and a decline in Chinese inventories, the Wall Street Journal reports.

Market observers pointed out that cargoes of West African crude had trouble finding buyers in Europe and the U.S., a sign of diminished demand.

“It’s a well-supplied market at this stage of the game,” Roland Austrup, chief executive of Integrated Managed Futures Corp, said in the article.

Supply does not seem to be an issue. Libya’s Ras Lanuf terminal opened its ports for oil shipments Wednesday. Fighting in Iraq have been far away from the oil fields. Additionally, Western sanctions on Russia have largely avoided the large oil sector. [Brent Oil ETF Faces Headwinds]

North Sea Brent Crude, a type of oil used as a benchmark for prices in European, African and Middle Eastern oil exports, have largely shrugged off tensions in the Middle East and Ukraine. BNO declined 0.5% over the past week, whereas USO has gained 0.2%.

Goldman Sachs economists Michael Cahill and David Mericle argue that it will take more serious conflicts to push up volatility in the energy markets, CNBC reports.

“One reason for the limited reaction recently is that despite its advances in northern and western Iraq, ISIS remains far from the key southern oil fields and export terminals,” the Goldman analysts said in the article. “A second reason is that shale has reduced the vulnerability of oil markets to supply shocks originating in the Middle East.”

United States Oil Fund


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

Max Chen contributed to this article.

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.