Will Producers' Output Cut Stabilize the Crude Oil Market?

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Will Producers' Output Cut Stabilize the Crude Oil Market? PART 1 OF 6

Crude Oil Market: Tug of War between the Bulls and Bears

Crude oil prices   

January 2017 WTI (West Texas Intermediate) crude oil (PXI) (ERX) (BNO) (USL) (ERY) futures contracts rose 0.4% and settled at $52.2 per barrel on December 19, 2016—the highest settlement in 17 months. However, Brent crude oil futures fell 0.5% and closed at $54.92 per barrel.

Crude oil prices are up due to the expectation that major oil producers’ production cut will curb oversupply in the market. OPEC (Organization of the Petroleum Exporting Countries) reached an agreement to cut production by 1.2 MMbpd (million barrels per day) at its November 30 meeting. Likewise, non-OPEC producers reached an agreement to cut production by 0.6 MMbpd at its December 10, 2016, meeting.

ETFs like the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO) fell 0.4% and 1.2%, respectively, on December 19, 2016.

Crude Oil Market: Tug of War between the Bulls and Bears

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Crude oil prices and major oil producers’ meeting 

Brent and WTI crude oil prices rose 16% and 13% between November 25 and December 20. For more on the OPEC and non-OPEC meeting, read Crude Oil Prices Skyrocket as OPEC Agrees to Cut ProductionHow Will OPEC’s Production Cut Impact Crude Oil Prices, and How OPEC and Non-OPEC Producers Affect Crude Oil Prices.

Crude Oil Market: Tug of War between the Bulls and Bears

Traders are skeptical 

Some traders are skeptical about whether the major production cut will actually be able to remove surplus crude oil from the market. The EIA (U.S. Energy Information Administration) estimates that US crude oil production will rise in the seven shale regions by 2,000 bpd (barrels per day) to 4.5 billion bpd in January 2017—compared to the previous month. For more, read US Crude Oil Rig Count: Collateral Damage in Crude Oil Prices. The rise in production from Libya also adds pressure to oil prices. For more, read Part 5 of this series. The rise in Cushing crude oil inventories could also pressure crude oil prices.

Impact on stocks and ETFs   

Changes in supply and demand impact crude oil prices. Moves in crude oil prices can impact oil and gas exploration and production companies’ earnings like Marathon Oil (MRO), Chevron (CVX), Whiting Petroleum (WLL), ConocoPhillips (COP), PDC Energy (PDCE), and Swift Energy (SFY).

Volatility in crude oil prices impacts ETFs and ETNs such as the PowerShares DWA Energy Momentum ETF (PXI), the Fidelity MSCI Energy ETF (FENY), the SPDR S&P Oil & Gas Equipment & Services ETF (XES), and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

What’s in this series?   

In this series, we’ll focus on the American Petroleum Institute’s crude oil inventories, OPEC’s spare production capacity, US crude oil movement by rail, Libya’s crude oil production, and crude oil price forecasts.

Let’s start with US crude oil prices during early morning trade on December 20, 2016.


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