Why Are Oil ETF Prices Falling?
Crude oil prices are falling sharply this week as OPEC+ announced plans to remove voluntary supply cuts earlier than expected.
Oil-related exchange-traded funds like the United States Oil Fund LP (USO) have followed oil’s price, declining more than 4% this week through Tuesday morning trading.
Crude oil fell after OPEC+—the group of 13 oil-producing nations—and Russia, which largely set global output and prices, will gradually phase out the planned cuts of 2.2 million barrels per day beginning in October and extending to September 2025.
The supply cut phase out will result in a higher oil supply than the market expected, which has led to downward repricing of the commodity, as well as increased hopes of falling inflation in 2024.
Oil’s Direct and Indirect Impact on Inflation
The price of oil impacts inflation, and this influence can be both direct and indirect. Here's a breakdown of how it works:
Direct Impact
Transportation costs: Oil is a major source of energy for transportation, powering vehicles, airplanes, and ships. When oil prices fall, the cost of transporting goods declines. This directly translates to lower prices for consumers at the gas pump and ultimately affects the cost of various products that rely on transportation throughout the supply chain.
Production costs: Many industries, like manufacturing and agriculture, use oil-based products like fuel and lubricants in their production processes. An increase in oil prices leads to higher production costs, which can be passed on to consumers through higher product prices.
Indirect Impact
Consumer expectations: Falling oil prices can lead to a general expectation of easing inflation among consumers, especially in a challenging economic environment when consumer budgets are tight. This can become a self-fulfilling prophecy, as businesses might lower prices preemptively based on the anticipated decline in demand or production costs.
Global economy: Oil is a globally traded commodity, and its price fluctuations can have a ripple effect on the global economy. An oil price decrease can lead to lower import costs for countries that rely heavily on oil imports, helping to cool inflation in some economies more than others.
Tip: For more information, see our list of oil ETFs and our article on the best-performing oil & gas ETFs.
Outlook on Oil and Its Impact on Inflation
Crude prices rise and fall depending on a variety of global factors. Supply and demand are key drivers, with factors like economic growth influencing demand and OPEC's production quotas impacting supply. Geopolitical instability in oil-producing regions can disrupt supply and cause prices to surge. Thus, ongoing the Russia-Ukraine war and the Israeli-Palestinian conflict will continue to weigh on oil prices in 2024.
While oil’s price plays a crucial role in the U.S. and global economies, the severity of the impact of oil prices on inflation can vary. For example, a small fluctuation in oil prices might not greatly impact inflation. However, a major spike or a sustained decline can have a more substantial effect.
Ultimately, the price of oil is a constantly fluctuating equation influenced by a multitude of global forces, hence its potential for volatility.