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Investors in Oil ETFs Rush to Sell Holdings in April and May

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Market weakness expected amid heavy selling by oil ETFs

According to Reuters, there’s an increasing trend among oil investors to sell their holdings in oil-based ETFs. Analysts believe this move is in line with weak fundamentals for the oil sector. The top four oil-based ETFs, which includes the United States Oil Fund (USO), experienced a drain of funds amounting to ~$478 million during the three weeks leading up to May 6, 2015.

The general outflows associated with oil ETFs signal a negative investor sentiment. Discussion among drillers such as EOG Resources (EOG) and Pioneer Natural Resources (PXD) about adding rigs and enhancing production could cause another slump in oil prices.

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Oil slides for fifth straight session until May 19

Despite appreciating by more than 30% since its multi-year lows in March 2015, West Texas Intermediate (or WTI) crude fell for the fifth straight session leading up to May 19, 2015.

Oil is priced in dollars. Recent gains posted by the dollar make it more expensive for traders who want to buy the commodity with currencies other than greenbacks. There’s also an opinion among market participants that oversupply still prevails within the crude oil market, which could make it hard to sustain US crude oil prices that exceed $60 per barrel.

Large unexpected drops in crude oil supplies fuel crude oil rally on May 20

According to the U.S. Energy Information Administration, there was a decrease of 2.7 million barrels in US commercial crude oil inventory for the week ended May 15, 2015. This decline in crude oil inventory fueled a rally in crude oil prices on May 20, 2015. Some believe that increased driving over the upcoming Memorial Day weekend and thus a draw on crude oil supplies could have fueled Wednesday’s rally.

Given this volatility of oil prices in the market, the short-term outlook remains bleak for drillers such as Transocean (RIG) and Diamond Offshore Drilling (DO) and exploration and production company Contango Oil & Gas (MCF). For more information on the short-term outlook for the energy sector, you can read Market Realist’s article Carl Icahn Sees Gloomy Short-Term Outlook for the Energy Sector.

In the next part of this series, we’ll take a look at Transocean’s performance in the context of the current commodities pricing environment.

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