VelocityShares 3X Long Crude ETN linked to the S&P GSCI often amplifies the gains or weaknesses in the price of crude oil. It appears that the ETF is gearing up to start the new weak with losses straight out of the gate as the ongoing supply glut in oil continues. Last Friday, there were signs that the ETF will crash because of the ill-timed increase in oil and product stock inventory. It was reported that oil inventories were increasing instead of decreasing because refiners are heading into the maintenance season.
The increase in stock and inventory suggests that supply is still more than the demand for crude oil. In line with the data on supply glut, the VelocityShares 3X Long Crude ETN linked to the S&P GSCI went ahead to record a 2.23% decline to close at $22.79. The ETF is starting with losses this Monday morning as it struggles with a 1.71% loss in premarket trading to $22.40 as at 4:49AM EST.
Oil compounds woes with oversupply and economic uncertainties
The fears that the current dynamic of oversupply in crude oil might continue is compounding the woes of investors in the VelocityShares 3X Long Crude ETN linked to the S&P GSCI .
This morning at 06:57GMT, International Brent crude oil futures lost $0.11 to trade around $45.58 per barrel. U.S. West Texas Intermediate (WTI) was also down $0.08 to $44.11 per barrel. Last week, both benchmarks crashed to a two-month low and today’s weakness in their trading prices suggests that they’ll revisit those lows.
Interestingly, analysts are of the opinion that the supply glut will continue and that crude oil prices will remain subdued. For instance, analysts at Barclays bank observes that the demand for oil in China and India has reduced because their economies slowing down. In the words of the analysts, “global oil demand in Q3 16 is growing at less than one-third the rate it was in Q3 15, weighed down by anemic economic growth.”
In addition, analysts at Morgan Stanley have observed that oil prices will most likely remain depressed in the remaining five months of this year. The analysts are especially worried by the increase in the supply of transport fuels and the unbelievable decline in the demand for such fuels. The analysts noted that “as a result, crude oil demand from refineries is underperforming product demand by a wide margin.”
Central Banks could have a stronger effect on how crude oil trades
In a surprising plot twist in the crude oil narrative, central bankers could have the greatest influence on how crude oil trades this week. The U.S. Federal Reserve will have a policy meeting through July 26-27 and the Bank of Japan will hold its meeting on July 28. The U.S. dollar has found strength in the last couple of weeks as the financial markets await decision from the fed about raising interest rates or leaving the rates unchanged.
If the fed signals that it is not ready to raise interest rates after its meeting the week, the U.S. dollar might tread lower and a weak greenback might be the perfect catalyst for a rally in oil. On the contrary, a move to raise interest rates could cause the greenback to soar higher and it could scare investors away from taking up long positions in oil.