How Cushing Inventories and OPEC Are Pressuring Crude Prices
Crude oil prices
January 2017 WTI (West Texas Intermediate) crude oil futures contracts fell 2.3% and settled at $49.77 per barrel on December 7, 2016. Brent crude oil futures also fell 1.7% and closed at $53 per barrel.
Crude oil prices fell due to skepticism over whether OPEC (Organization of the Petroleum Exporting Countries) will cut production by 1.2 MMbpd (million barrels per day) as members agreed at its November 30 meeting. A massive surge in Cushing crude oil inventories also pressured crude oil prices. The higher-than-expected build in product inventories could also contribute to the fall in crude oil prices. ETFs like the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) follow crude oil futures contracts. These ETFs fell 1.7% and 3.3%, respectively, on December 7, 2016.
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Crude oil prices and OPEC meeting
Brent and WTI crude oil prices have gained 10% between November 28 and December 7, 2016. For more on the OPEC meeting, read Crude Oil Prices Skyrocket as OPEC Agrees to Cut Production and How Will OPEC’s Production Cut Impact Crude Oil Prices.
Traders are skeptical
Traders are skeptical about whether OPEC and Russia will actually be able to remove surplus crude oil from the market. Near record production from OPEC and Russia will pressure crude oil prices. The near record production that we are seeing raises questions about whether the excess crude oil supply will actually fall.
On December 7, 2016, Nigeria’s oil minister said that OPEC would cut production even if only Russia supported the OPEC deal among the non-OPEC producers. A non-OPEC producer meeting is scheduled on December 10, 2016. For more on this, read Will Non-OPEC Producers Support the Crude Oil Bulls?
US crude oil inventories
The EIA (U.S. Energy Information Administration) released its weekly crude oil inventory report on December 7, 2016. It reported that US crude oil inventories fell by 2.4 MMbbls (million barrels) between November 25 and December 2, 2016. However, Cushing crude oil inventories rose 3.8 MMbbls for the same period. To learn more, read Will Cushing Crude Oil Inventories Limit Upside for Crude Oil?
We’ll look at US crude oil inventories and their regional breakdown in part two of this series. For details on gasoline and distillate inventories, read part six and part eight of this series. Earlier, the American Petroleum Institute (or API) estimated that US crude oil inventories fell by 2.2 MMbbls between November 25 and December 2, 2016. The API also added that Cushing crude oil inventories rose by 4.0 MMbbls for the same period, the largest build since 2008.
Crude oil volatility index
The CBOE crude oil volatility index fell 2.9% to 36.1 on December 7, 2016. It hit 32.7 on October 19, 2016, its lowest level since June 26, 2015. In contrast, it hit 50.1 on December 7, 2016, the highest level in the last nine months.
Volatility in crude oil and natural gas prices also impact funds such as the iShares Global Energy ETF (IXC), the iShares U.S. Energy ETF (IYE), the Fidelity MSCI Energy ETF (FENY), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the United States Brent Oil ETF (BNO).
In this series, we’ll look at US crude oil production, refinery demand, imports, and US gasoline and distillate prices and inventories. We’ll start by looking at US crude oil prices in early morning trade on December 8.