The Libyan supply jitters come on top of a backdrop of tightening OPEC production. The cartel and its allies agreed to slash their output by 1.2 million barrels per day starting in January. Those cuts—which currently have a 92% compliance rate, according to the International Energy Agency—are scheduled to last through June and then may be extended through the end of the year if members agree.
In addition to coordinated OPEC cuts, traders are nervous about involuntary cuts by some members. Venezuela’s oil production, for example, is on a straight path lower due to a full-blown economic crisis in the country and lack of investment. Venezuela’s oil production tumbled to less than 900,000 barrels per day in March, 40% below year-ago levels.
Meanwhile, traders are anxiously awaiting news on whether the Trump administration will extend waivers for eight countries to continue importing Iranian crude oil in light of U.S. sanctions on Iran. If they are extended as expected, Iranian oil supply should be stable. If they’re not, look for exports out of the country to dive, tightening the global market.
US Oil Boom Going Strong
With so many supply issues coming to the fore, it’s easy to get carried away with the bullish case for oil prices. But that enthusiasm should be tempered by the relentless climb in U.S. crude production, which stands at an all-time high of 12.2 million barrels per day.
Up a whopping 1.8 million barrels per day from where they were a year ago, there’s little reason to expect U.S. oil supplies will slow any time soon, especially with prices making a comeback.
That creates a relatively balanced outlook for oil: Healthy demand and bubbling supply disruptions on the one hand and booming U.S. production on the other.
US Oil Production
USO, UWT and other oil-tracking ETFs may have more room to run, but don’t expect the climb from here to be as swift as the rebound from December’s lows.
Indeed, regardless of what oil prices do from here, a case can be made that ETFs tied to energy stocks, like the $14 billion Energy Select Sector SPDR Fund (XLE) or the $2.3 billion SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are the better bet.
According to Nicholas Colas, co-founder of DataTrek Research, energy stocks’ weighting in the S&P 500 is a mere 5.4%, well below its average level of around 10%.
A bounce back in energy stocks to a more “average” weighting could propel those ETFs higher.