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WTI (West Texas Intermediate) crude oil closed at $48.24 per barrel on September 30, which represents a ~0.9% rise from the previous trading session.
In a major surprise to oil investors, OPEC (Organization of the Petroleum Exporting Countries) members reached the output limit deal at a meeting in Algeria on September 28, 2016. The members have agreed to cap their oil output between 32.5 million barrels per day and 33 million barrels per day. In August 2016, OPEC oil production was 33.2 million barrels per day.
According to the IEA (International Energy Agency), the world’s total oil demand was 95.6 million barrels per day in 2Q16. The total supply of oil was at 95.9 million barrels per day in 2Q16. The market was oversupplied by 0.31 million barrels per day in 2Q16.
The OPEC supply was around 33.0 million barrels per day in 2Q16. According to an IEA forecast, world oil demand could be 97.0 million barrels per day in 4Q16. This indicates a rise of 1.4 million barrels per day in oil demand compared to 2Q16 levels. Therefore, OPEC capping its output limit near 33 million barrels per day could potentially help balance the market.
Earlier in the week ending September 30, 2016, crude oil prices rose due to the bullish EIA (US Energy Information Administration) inventory report and the OPEC agreement. US crude oil is currently 5.8% below its 2016 high of $51.23 on a closing price basis.
Copper (JJC) rose 0.8%, and iron ore (SLX) fell 1.6% between September 23 and September 30, 2016. The fall in iron ore prices coincides with the oversupplied market. Copper prices were buoyed by growth in Chinese demand.
Recoveries in iron ore and copper prices started one month before crude oil began to recover on February 11, 2016. Market sentiments surrounding industrial metals such as copper and iron ore could indicate crude-oil-related sentiments as well.
Gold futures (GLD) fell 1.8% from September 23 to September 30. The fall in gold could be attributed to the improving US economy, rising expectations of a rate hike, and stronger US GDP figures. During this period, the US dollar (UUP) was almost flat.
The gold-to-oil ratio stood at 27.2x on September 30, 2016. On February 11, 2016, it reached 47.6x, its highest level since 1970. On February 11, crude oil touched a 12-year low. Historically, spikes in the gold-to-oil ratio indicate changes in market sentiment from growth-driven commodities to safe-haven assets.
Crude-oil-related sentiment also impacts ETFs and ETNs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the DB Crude Oil Double Short ETN (DTO), the iShares US Oil Equipment & Services ETF (IEZ), the Fidelity MSCI Energy Index ETF (FENY), the United States Oil ETF (USO), the Credit Suisse X-Links WTI Crude Oil ETN (OIIL), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
In the next part of this series, we’ll look at the impact of the dollar index on crude oil prices.