Supply Still a Problem for 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) have gotten a lift in recent sessions as oil prices have ascended to their highest levels since June, but an oversupplied markets remains an issue for crude.

OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers.

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Many traders remain bearish over the short-term, betting on weakening seasonal trends. Money managers increased wagers on declines in oil prices to a record on increasing U.S. inventories and ahead of a seasonal refinery maintenance that will curb crude demand – futures have dipped in each of the past five Septembers, reports Mark Shenk for Bloomberg.

U.S. shale drillers have been paring production in an effort to improve profitability, but some OPEC members and other major producers, including Russia, continue pumping despite lower prices. That scenario is seen as a significant headwind for oil price upside.

“Low-cost players such as Russia, combined with an upcoming ‘wall of supply’ from large-scale projects commissioned in the past 5-10 years, and additional supplies from Libya and Nigeria will make it difficult for crude prices to rise above US$55 in the near term, Goldman Sachs’s head of commodities research, Jeff Currie, said in an interview with Bloomberg television,” reports

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OPEC plans to diminish output to a range of 32.5 to 33.0 million barrels per day from its current estimated output of 33.24 million barrels per day. While Saudi Arabia, OPEC’s biggest producer, has agreed to reduce output, Iran, Libya and Nigeria might not follow suit.

“Last week, Goldman Sachs said that the OPEC output deal could add US$10 to crude prices. The Goldman analyst team, however, noted that it was skeptical about the chances of success for the deal. The bank pointed out that OPEC members don’t always feel obliged to stay within quotas, which will contribute to the ongoing uncertainty on oil markets,” according to OilPrice.

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

United States Brent Oil Fund

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