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Will OPEC+ Output Cuts At All Boost Oil ETFs Ahead?
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In the latest meeting, the Organization of the Petroleum Exporting Countries and allies led by Russia (together known as OPEC+), agreed to extend production cuts of 3.66 million barrels per day (bpd) until the end of 2025, along with prolonging cuts of 2.2 million bpd until September 2024. This makes up about 5.7% of global demand.
The move aims to stabilize the market, with Brent crude oil prices hovering near $80 per barrel, below the budgetary requirements of many OPEC+ members. But despite efforts by the OPEC+ to stabilize oil prices, oil may remain subdued in the near term. Let’s delve a little deeper.
Inside the Likely Bearish Market Sentiment
Despite the extension of production cuts, analysts from Goldman Sachs described the meeting as bearish, as quoted on CNBC. The bearish sentiment stemmed from the detailed plan to phase out voluntary cuts by eight OPEC+ members over the Oct 2024 to Sep 2025 period, signaling a potential increase in production over time.
This communication of a gradual unwind raised concerns about maintaining low production levels, particularly given the desire of several members to raise output due to high spare capacity.
Israel-Hamas Ceasefire Ahead?
In addition to market factors, geopolitical tensions in the Middle East, particularly the conflict between Israel and Hamas, influenced market sentiment. Mediators urged Israel and Hamas to finalize a ceasefire and hostage release deal outlined by U.S. President Joe Biden.
If there is a ceasefire between Israel and Hamas, oil prices might fall further on less geopolitical tension. However, Israel indicated that it would not formally end the war as long as Hamas remained in power, further complicating the scenario.
Lower Oil Demand Ahead?
The International Energy Agency (IEA) on May 15 cut its forecast for 2024 oil demand growth, widening the gap with the oil producer group OPEC in terms of the expectations for this year's global oil demand outlook.
Global oil demand this year will increase by 1.1 million bpd down 140,000 bpd from the previous forecast, mainly indicating weak demand in developed OECD nations. The IEA said that the lower 2024 forecast was linked toward poor industrial activity. Plus, in Europe, a falling share of diesel cars was already weakening consumption.
Fed Rate Policy to Play a Key Role
The Fed is expected to keep rates higher for longer given the sticky inflation and decent US growth. If this happens, the US dollar is likely to stay strong for a while. Since most commodities alongwith oil are traded in the greenback, a rising greenback/US dollar is negative for oil prices. Moreover, continued higher US interest rates are negative for the economic growth and the oil demand. Hence, we can conclude a hawkish Fed for long may act as a headwind for the oil prices.
ETFs in Focus
Against this backdrop, investors can keep a track of oil ETFs like United States 12 Month Oil Fund LP (USL - Free Report) , Invesco DB Oil Fund (DBO - Free Report) , United States Oil Fund LP (USO - Free Report) , ProShares K-1 Free Crude Oil Strategy ETF (OILK - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) . These ETFs have gained more than 1% in the past one week but may not advance much in the near term.
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Will OPEC+ Output Cuts At All Boost Oil ETFs Ahead?
In the latest meeting, the Organization of the Petroleum Exporting Countries and allies led by Russia (together known as OPEC+), agreed to extend production cuts of 3.66 million barrels per day (bpd) until the end of 2025, along with prolonging cuts of 2.2 million bpd until September 2024. This makes up about 5.7% of global demand.
The move aims to stabilize the market, with Brent crude oil prices hovering near $80 per barrel, below the budgetary requirements of many OPEC+ members. But despite efforts by the OPEC+ to stabilize oil prices, oil may remain subdued in the near term. Let’s delve a little deeper.
Inside the Likely Bearish Market Sentiment
Despite the extension of production cuts, analysts from Goldman Sachs described the meeting as bearish, as quoted on CNBC. The bearish sentiment stemmed from the detailed plan to phase out voluntary cuts by eight OPEC+ members over the Oct 2024 to Sep 2025 period, signaling a potential increase in production over time.
This communication of a gradual unwind raised concerns about maintaining low production levels, particularly given the desire of several members to raise output due to high spare capacity.
Israel-Hamas Ceasefire Ahead?
In addition to market factors, geopolitical tensions in the Middle East, particularly the conflict between Israel and Hamas, influenced market sentiment. Mediators urged Israel and Hamas to finalize a ceasefire and hostage release deal outlined by U.S. President Joe Biden.
If there is a ceasefire between Israel and Hamas, oil prices might fall further on less geopolitical tension. However, Israel indicated that it would not formally end the war as long as Hamas remained in power, further complicating the scenario.
Lower Oil Demand Ahead?
The International Energy Agency (IEA) on May 15 cut its forecast for 2024 oil demand growth, widening the gap with the oil producer group OPEC in terms of the expectations for this year's global oil demand outlook.
Global oil demand this year will increase by 1.1 million bpd down 140,000 bpd from the previous forecast, mainly indicating weak demand in developed OECD nations. The IEA said that the lower 2024 forecast was linked toward poor industrial activity. Plus, in Europe, a falling share of diesel cars was already weakening consumption.
Fed Rate Policy to Play a Key Role
The Fed is expected to keep rates higher for longer given the sticky inflation and decent US growth. If this happens, the US dollar is likely to stay strong for a while. Since most commodities alongwith oil are traded in the greenback, a rising greenback/US dollar is negative for oil prices. Moreover, continued higher US interest rates are negative for the economic growth and the oil demand. Hence, we can conclude a hawkish Fed for long may act as a headwind for the oil prices.
ETFs in Focus
Against this backdrop, investors can keep a track of oil ETFs like United States 12 Month Oil Fund LP (USL - Free Report) , Invesco DB Oil Fund (DBO - Free Report) , United States Oil Fund LP (USO - Free Report) , ProShares K-1 Free Crude Oil Strategy ETF (OILK - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) . These ETFs have gained more than 1% in the past one week but may not advance much in the near term.