Oil United States Oil Fund LP (ETF)(NYSEARCA:USO) Slips From Monday Highs But Loses Capped

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Oil prices witnessed reversal today after it grossed up 7% yesterday. The reason that led to softening of oil prices is believed to be uneasiness over the oil glut scenario, which appears to be unresolvable through the recent oil output freeze.

Paring gains

The global benchmark, Brent Crude, tumbled 0.85% to $34.49 while West Texas Intermediate fell 1.44% to $32.91, still holding above $32. Last week, Saudi Arabia and Russia reached a critical deal, where the two nations decided to lock the oil production levels to January volumes. However, the deal has to still see consent from other oil producing nations, only after which it will become applicable.

While many analysts viewed the deal as a precursor to more production cuts, Energy Aspects’ analyst, Dominic Haywood believed that the freezing of output will not help but extend the oversupply scenario. Apart from this, analysts are unsure if Iran will agree to such output freeze at this time when it has been freed from Western-imposed sanctions.

Doubt over production cut

Another analyst from Phillip Futures expressed doubt if oil prices could rise further in the absence of concrete measures. Meanwhile, Jefferies, an investment bank, projected that the oil production by OPEC could reach as high as 32.6 million barrels per day in the second quarter. The bank foresees an improvement in demand and supply balance from the third quarter onwards, mainly due to production cut by members other than OPEC.

To summarise, a majority of analysts have cautioned that increasing output from Iran will negate any production drop. Such an opinion has unnerved the market mood, which has flung back in support of safe-haven assets such as yen and franc.

Contrasting these views is a report from International Energy Agency (IEA), which published today, said that oil prices will double by 2020. The agency gave a logical explanation stating that the producers will eventually cut back investments leading to a reduction in oil supplies. According to IEA, oil prices could climb back to $80 per barrel but rather slowly than before.

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