America Oil Fund (USO) is the commodity fund which is tied to the worth of WTI crude oil. Subsequently, talking in regards to the prospects of this ETF, there is no such thing as a different approach than to research the oil market.
From the very starting, I need to make clear that I don’t count on a bearish oil market subsequent 12 months. I wrote about this in mid-November. However proper now, I imagine that the oil market is considerably overheated and a correction is sort of possible.
Let’s begin with the truth that the dynamics of OPEC forecasts relating to oil demand subsequent 12 months remains to be destructive:
In December, the EAI additionally lowered its forecast for subsequent 12 months’s international oil demand:
We forecast that oil demand will fall by 8.8 mb/d y-o-y in 2020, a modest 50 kb/d downward revision from our earlier Report. Our 2021 demand forecast was revised down by 170 kb/d. That is primarily due to one other downgrade for jet gasoline/kerosene demand…
Typically, apparently, neither OPEC nor the EIA appears to share optimism in regards to the begin of vaccination in opposition to coronavirus within the US and Europe.
It’s value recalling right here that in the meanwhile there is no such thing as a slowdown within the unfold of the coronavirus pandemic. Due to this, extra restrictions are launched in Europe and even the US. Apparently, there shall be no surge in journey in the course of the New 12 months holidays. In any case, this implies low oil demand…
On the availability facet, there are additionally few optimistic elements for the market.
First, based on the identical EIA data, in November international oil provide rose 1.5 mb/d to 92.7 mb/d. The principle motive for this was the US and Libya.
The variety of lively rigs in the US increased by 50% to 258 models in comparison with the minimal degree in August this 12 months. Apparently, the present oil value is already costly sufficient for shale manufacturing in the US to start to accentuate. So, for my part, within the close to future it’s cheap to count on continued progress in oil manufacturing in the US.
Subsequent. Libya continues to quickly improve its oil manufacturing. In November alone, the nation elevated manufacturing by 0.600 mb/d. Now production is about 1.25 mb/d. Judging by the statements of Libyan officers, they received’t discuss a possible OPEC quota till manufacturing within the nation exceeds 1.7 mb/d.
Lastly, as we all know OPEC and allied producers corresponding to Russia will improve provides by 0.5 mb/d as early as subsequent month. No one desires to lose its market share, so I feel manufacturing progress shall be fast.
It stays to be recalled that oil shares are nonetheless at file ranges, which doesn’t indicate a big improve in oil costs:
- There are various elements in favor of a rise in oil provide within the close to future. On the identical time, the outlook for demand stays pessimistic.
- The second wave of the coronavirus pandemic has not ended. It’s not even clear if it reached its peak. It is a critical uncertainty issue for the oil market.
- By and enormous, the futures market doesn’t at all times replicate the steadiness of provide and demand. Mainly, it displays the expectations of its members. Apparently, the overestimated expectations for vaccines have pushed the market too excessive and too quick.
In mild of the above information, I imagine that the likelihood of a correction within the oil market within the close to future is critical. For USO, this implies a possible decline to $30 within the subsequent two months
Disclosure: I/we have now no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.