US Crude Oil Is above $52: What to Expect in the Future

US crude oil last week

WTI (West Texas Intermediate) crude oil May futures closed at $52.24 per barrel on April 7, 2017—a 1% rise from the previous trading session. May futures for US crude oil (USO) (USL) (OIIL) (DBO) rose 3.2% in the week ending April 7.

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In the same week, the Energy Select Sector SPDR ETF (XLE) rose 0.7%, while the S&P 500 Index (SPY) (IWM) (SPX-INDEX) fell 0.3%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) didn’t change. Energy accounts for 6.6% of the S&P 500 Index and 6.4% of the Dow Jones Industrial Average Index.

 

The S&P 400 Midcap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, fell ~0.3% during this period. The FTSE 100 Index (UKX-INDEX) (EWU) fell 0.4%, while the CAC 40 Index (PX1-INDEX) (EWQ) rose 0.2% during this period. Oil and gas companies account for 14.1% of the FTSE 100 Index and 11.6% of the CAC 40 Index. Movements in crude oil can drive broader equity markets.

Last week, geopolitical tensions arising from the US missile strike on Syria and motor gasoline inventories falling by 0.6 MMbbls (million barrels) contributed to gains in crude oil prices. Higher US refinery capacity utilization in the previous week also supported oil’s rally.

However, US crude oil inventories reached a record of ~535.5 MMbbls in the week ending March 31, 2017, according to EIA (U.S. Energy Information Administration) data released on April 5, 2017. Oil rigs rose to 672 for the week ending April 7, 2017—the highest since September 4, 2015. In the 20 weeks since OPEC’s production cut deal in November 2016, the US added oil rigs on 19 occasions. Rising oil rigs and rig efficiency could have a negative impact on crude oil prices.

Since OPEC’s production cut deal in November 2016, US oil production has risen by ~0.5 million barrels per day, which is ~42% of OPEC’s pledged production cuts, according to weekly EIA production data.

Natural gas

Natural gas (UNG) (BOIL) May futures rose 2.2% in the week ending April 7, 2017. They closed at $3.26 per million British thermal units on April 7—a fall of 2.1% from the previous trading session due to warmer weather forecasts. Rising US oil rigs and natural gas rigs could also have a negative impact on natural gas prices. Natural gas rigs rose to 165 for the week ending April 7, 2017—the highest since December 25, 2015.

Energy ETFs

Crude oil is an important driver for energy ETFs. Crude oil and natural gas sentiments impact ETFs and ETNs such as the PowerShares DWA Energy Momentum ETF (PXI), the iShares US Oil Equipment & Services (IEZ), the Fidelity MSCI Energy ETF (FENY), and the ProShares UltraShort Bloomberg Crude Oil (SCO).

Go to Market Realist to read more.

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Recent improvement of crude oil prices occurred due to Donald Trump’s irrational decision to strike Syria. In fact, this improvement is based on sentiments which are specific to the crude oil trading business environment. In other words, the improvement we witness today is based on simple overreaction.

I would think that such conclusion is logical because there is no change in fundamentals. In addition, explanation that slight improvement of oil prices triggered by concerns over geopolitical tension might not be considered as reasonable because such geopolitical tension is in place for so many years. Besides, Trump’s strike did not cause any substantial damage, except the damage to the U.S. Budget due to pointless waste of tax payers’ money.

Since the reason for price improvement is insignificant, the markets optimism will be short lived. Because there is no improvement in fundamentals, the other factors suggest that we may see a drop of oil prices in the near future.

I suspect that one of the main factors which could supress crude oil prices are: rise of U.S. rig count, increase of the U.S. crude oil production volumes, Trump’s unpredictability which could lead to trade wars resulting in lower demand, recently announced consencus that the world economy’s growth is expected to drop substantially, followed by recession within next 12 to 18 months.

Additionally, we shall keep in mind that renewables become more competitve due to continuously improving techology. This is another factor which indicates that the share of oil and gas in overall demand would either remain relatively flat or start shrinking.

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