Why Oil ETFs Are Rising Again

September 24, 2018

US Oil Production Surges

Sources: Energy Information Administration, Bloomberg

 

Perfect Environment

It’s the perfect environment for U.S. oil producers. At least for now, they have the green light to continue pumping full throttle, while enjoying relatively high prices that could head even higher.

Indeed, in the near term, the market is more likely to see a shortage of crude than a glut. A futures curve in backwardation, with near-month oil futures trading at higher values than later months, suggests there is a tight market for physical oil.

“As long as the backwardations continue to widen, you can’t be short of crude,” said Dennis Gartman, president of The Gartman Letter, who noted that oil prices could rally another $5 from here.

Supporting that bullish futures curve is demand, which is growing a brisk 1.4 million barrels per day from a year ago, and a lack of spare production capacity, with most producers pumping as much oil as they can.

It’s because of this that analysts say a meeting of OPEC producers on Sunday probably won’t result in a material increase in the cartel’s output, even as they discuss how to rejigger individual member quotas to reflect recent production gains in Saudi Arabia and other countries.

Understandably Cautious

While the prospects for further oil price increases are growing, energy investors remain understandably cautious, as gnawing memories of the downturn from a few years ago linger.

Analysts at Credit Suisse estimate that U.S. exploration and production companies are only discounting $51 WTI crude oil prices, well below current levels.

Some of that caution is warranted. U.S. production is going gangbusters, which was the catalyst for the previous crash in prices. At the same time, demand, while strong now, could stumble if consumers begin balking at rising fuel costs.

The boom/bust reputation of the oil industry means it may take a more sustained period of elevated prices before investors truly believe they are here to stay.

 

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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