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Energy Commodities: Why They Could Be Weak This Week

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Energy Commodities: Why They Could Be Weak This Week PART 1 OF 5

Why US Crude Oil’s Return to $55 Could Be Grueling

US crude oil

May futures for US crude oil (USO) (USL) (OIIL) (DBO) rose 0.60% in the week ended March 17, 2017. WTI (West Texas Intermediate) crude oil May futures closed at $49.31 per barrel on March 17, 2017, a 0.10% rise from the previous trading session.

Why US Crude Oil’s Return to $55 Could Be Grueling

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In the same week, the Energy Select Sector SPDR ETF (XLE) rose only 0.30%, and the S&P 500 Index (SPY) (IWM) (SPX-INDEX) rose 0.20%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.10%. The technology-heavy NASDAQ Composite (COMP-INDEX) (QQQ) rose 0.70% over the same period.

Rising oil rigs could have a negative impact on oil prices. For the week ended March 17, 2017, oil rigs rose 14 for a total of 631, the highest level since October 2, 2015. US crude oil inventories, which are near record levels, could also adversely impact oil prices. Rising US oil production and high inventory levels reduce the positive impact of OPEC’s (Organization of the Petroleum Exporting Countries) production cuts on oil prices.

On March 17, 2017, active crude oil futures were trading at a discount of $1.68 to the futures contract 12 months ahead. On March 14, 2017, active oil futures were trading at a discount of $2.08, the highest level since February 9, 2017. The fall in the futures spread could point to the easing of investor concerns about the crude oil demand-supply balance.

On March 19, 2017, at 11:43 PM EST, US crude oil (OIIL) May futures were trading at $48.93 per barrel, which represents a fall of 0.80% over the closing price on March 17, 2017. The persistence of these bearish factors could continue to pressure US oil prices, making the $55 level difficult to achieve anytime soon. On February 23, 2017, WTI crude oil active futures closed at $54.45 per barrel, the highest since July 6, 2015.

Natural gas

Natural gas (UNG) (BOIL) April futures fell 2.0% in the week ended March 17, 2017. They closed at $2.95 per MMBtu (million British thermal units) on March 17, a 1.6% rise from the previous trading session due to lower temperature forecasts. However, natural gas clearly underperformed the commodity complex last week. Rising US oil rigs and bearish inventory data could have a negative impact on natural gas prices.

Energy ETFs

Crude oil is an important driver for energy ETFs. Crude oil and natural gas–related 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).

In the next part of this series, we’ll see how economic data and the US dollar could impact crude oil and natural gas prices.

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