Oil ETFs Relinquish 2024 Gains as WTI Hits 3-Year Low

Traders are worried about an oversupplied market.

The price of West Texas Intermediate crude oil (WTI), one of the primary measures of oil markets, flirted with three-year lows on Tuesday as oversupply concerns weighed on the commodity.

ETFs tied to oil, like the United States Oil Fund (USO) and the Brent Oil Fund (BNO), fell by 4%, pushing them into the red for the year.

Chinese oil demand contracted for a third consecutive month in June, according to the latest data from the International Energy Agency, driven by “a slump in industrial inputs, including for the petrochemical sector.”

The agency expects global oil demand to rise by less than one million barrels per day in both 2024 and 2025—weak growth that comes at the same time that OPEC is set to loosen its supply curbs.

The oil cartel will gradually unwind its production restrictions starting in the fourth quarter, though the group “could pause or reverse its decision depending on prevailing market conditions,” per the IEA.

But even if OPEC refrains from producing more oil, that will have no bearing on output from other oil producers who will continue to pump full tilt. 

Non-OPEC oil producers will grow their production by 1.5 million barrels per day in 2024 and 2025, according to IEA forecasts, much more than expected demand growth.

This will lead to global inventories building by “an average 860 kb/d next year.”

That possibility is what’s pushed oil prices to three-year lows this week. And with economic risks seemingly tilted to the downside, traders are acting first and asking questions later.

XLE Underperforms

The Energy Select Sector SPDR Fund (XLE), a fund that holds a basket of energy stocks, is up 2.5% year-to-date, a sharp underperformance versus the 16% gain for the SPDR S&P 500 ETF Trust (SPY).

XLE is the worst-performing sector ETF among SPDR’s 11 U.S. stock market sector ETFs.