The United States Oil ETF USO is trading lower by 1.9% on Tuesday morning despite crude oil prices hitting their highest level in six years.
What Happened? West Texas Intermediate crude futures traded as high as $76.98 before pulling back to $75.15 in early trading. The peak represents the highest crude oil prices have reached since November 2014.
Why It’s Important: The spike in crude oil prices comes after OPEC+ talks to potentially increase global production starting in August were postponed indefinitely without an agreement.
Oil prices are up roughly 60% year-to-date as demand ramps back up due to summer travel and economic reopenings. July 4 weekend travelers in the U.S. faced a national average gasoline price above $3 per gallon, its highest level in nearly seven years.
Saudi Arabia had proposed a plan to boost OPEC+ oil output, but the United Arab Emirates reportedly shot down the deal. Without a deal, current output quotas will remain in place for now, potentially creating supply shortage and higher oil and gasoline prices in the near term, experts say.
During the pandemic in April 2020, OPEC took unprecedented measures in taking nearly 10 million barrels per day or crude oil production offline.
What's Next: Global economic shutdowns and travel restrictions eliminated demand for oil, sending WTI futures prices temporarily below $0/bbl for the first time in history. However, the oil market imbalance has now shifted back in the other direction, leaving supply as the primary near-term concern.
OPEC+ production curbs have been eased in recent months, but OPEC+ production still stands about 5.8 million barrels per day below pre-pandemic levels.
“This impasse will lead to a temporary and significantly larger-than-anticipated deficit, which should fuel even higher prices for the time being. The summer breakout in oil prices is set to gather steam at a fast clip,” TD Securities said in a note to clients.
Some sources within OPEC+ say the group will reconvene once again in coming days and ultimately agree on an August production hike, according to Reuters. However, their OPEX+ sources reportedly said there will be no production increase in August.
Benzinga’s Take: Investors who believe the crude oil rally will continue unless OPEC+ reaches a production hike agreement can buy the USO fund to bet on crude oil futures prices directly, or they can buy popular oil stock ETFs including the VanEck Vectors Oil Services Etf OIH and the Energy Select Sector SPDR Fund XLE.
All three funds were trading lower on Tuesday morning, possibly suggesting that the market is pricing in a meaningful OPEC+ production hike at some point in the coming weeks.
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