Some Predictable Catalysts For Oil, By Way Of Fed's Rising Interest Rates

The United States Oil Fund USO is down nearly 2.7 percent over the past week, bringing the heavily traded oil exchange-traded product's year-to-date loss to nearly 22 percent. Those data points, among others, highlight oil's status as one of 2017's worst-performing commodities.

OPEC has attempted to reduce out, but those efforts have been matched with counter measures from North American shale producers, which have refused to scale back production even amid slumping oil prices.

There might be some good news for commodities, including oil, and those positives come courtesy of the Federal Reserve's efforts to normalize U.S. interest rates.

The Fed And Oil

“Historically rising interest rates are positive for commodities for two main reasons,” said S&P Dow Jones Indices in a recent note. “One is the return on collateral increases, pushing up the total return. The other reason is that producers may be disincentivized to produce and store as carrying costs increase. This is fundamentally based on the futures relationship to the spot market.”

As is widely known, the Federal Reserve unveiled its second interest rate hike of 2017 earlier this week, but oil and the related exchange traded products have yet to respond. On Wednesday, nearly 10 oil ETFs hit 52-week lows and several hit record lows. That does not include a slew of diversified commodities funds, many with significant oil exposure, that also hit new 52-week lows.

Slumping Energy

The energy sector continues sliding as well. On Thursday, 17 equity-based energy ETFs hit 52-week lows and that does not include several diversified natural resources funds with large exposure to the energy sector.

Historical data indicate rising rates help commodities.

“On average in rising rate periods, the S&P GSCI Total Return index has gained 43.5 percent more than the spot index that has gained on average 31.3 percent, showing that rising rates can drive carrying costs higher, making it less beneficial to hold inventory,” according to S&P Dow Jones Indices.

S&P Dow Jones Indices notes oil outperforms gold when interest rates rise and that Brent outperforms West Texas Intermediate, indicating traders may want to consider the United States Brent Oil Fund BNO over USO.