ETFs To Watch As IEA Forecasts Weaker Global Oil Demand

Oil prices plunged to the lowest level in nearly a week on Tuesday after the International Energy Agency (IEA) predicted that global oil demand this year will be weaker than earlier expectations. Moreover, the report also forecast that crude markets are poised to suffer from oversupply till the first half of the next year. Sluggish economic conditions prevailing in Asian countries and Europe were said to have resulted in the weaker outlook.

IEA’s Dismal Projections

The agency anticipates that global oil demand is poised to increase 1.3 million barrels per day (bpd) this year, down 100,000 bpd from its earlier estimate. Outlook for growth in global oil demand in 2017 was also reduced by 200,000 bpd to 1.2 million bpd, lower than this year’s growth forecast. Declining oil demand during the ongoing third quarter emerged as the main reason behind the slashing of the demand forecast (read: Should You Buy Oil ETFs Ahead of the OPEC Meet?).

The agency expects year-on-year growth in global oil demand for the third quarter to be 800,000 bpd, significantly lower than growth of 1.6 million bpd and 1.4 million bpd in the first and second quarter, respectively. Regarding the outlook, IEA’s senior oil economist, Matt Parry said: “both Chinese and European oil demand growth have all but vanished by 3Q16.”

U.S. crude inventories are anticipated to continue increasing despite the recent slump that was the maximum in 17 years. IEA reported that OPEC boosted production by about 20,000 bpd to 33.47 million bpd last month. Also, the United Arab Emirates produced at a rate of 3.09 million bpd in August, setting a new record. The report also showed that developed economies are increasing their inventories. It said that inventories touched a record high of more than 3.1 billion barrels last month (read: 3 Energy ETFs at 52-Week Highs on Huge Inventory Drop).

Supply glut in addition to weaker demand is expected to affect the oil markets for a longer period of time. The report stated: “This supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year.”

Market Impact

IEA’s disappointing outlook dragged WTI crude and Brent crude by 3.1% and 2.6% to $44.90 per barrel and $47.10 a barrel, respectively, on Tuesday. The oil ETFs – United States Oil (NYSE:USO) (V:USO) and United States Brent Oil (AX:BNO) – fell 2.5% and 2.3% yesterday. Decline in oil prices also had a negative impact on the energy sector, which in turn dragged down major U.S. benchmarks (read: Crude Output Control Speculation Resurfaces: 4 ETFs to Watch).

The broader energy sector ETF – Energy Select Sector SPDR ETF (NYSE:XLE) XLE – witnessed a drop of 2.9% during the day. Other energy sector ETFs including Vanguard Energy ETF VDE, SPDR S&P Oil & Gas Exploration & Production ETF (V:XOP) and iShares US Energy IYE plunged 2.9%, 4.3% and 2.9%, respectively (read: Profit from Wall Street Sell-Off with These Inverse ETFs).

What Lies Ahead?

Amid IEA’s weak global demand outlook, the focus will entirely shift toward the meeting of major oil producers scheduled to take place during September 26-28 in Algeria. It is currently speculated that the OPEC and non-OPEC members may discuss potential ways to control oil production in this meeting. Hence, the outcome of this meeting and its impact on the crude markets are will be closely watched by the investor community.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>