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Will Energy Commodity Sentiment Take a Hit this Week?

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Will Energy Commodity Sentiment Take a Hit this Week? PART 1 OF 5

We Might See the End of Oil’s Recent Rise

US crude oil last week

WTI (West Texas Intermediate) crude oil May futures closed at $53.18 per barrel on April 13, 2017—a 0.1% rise from the previous trading session. May futures for US crude oil (USO)(USL)(OIIL)(DBO) rose 1.8% between April 7 and April 13.

We Might See the End of Oil’s Recent Rise

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During this period, the Energy Select Sector SPDR ETF (XLE) fell 1.5% while the S&P 500 Index (SPY)(IWM)(SPX-INDEX) fell 1.1%. The Dow Jones Industrial Average (DIA)(DJIA-INDEX) fell 1%. 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 ~1.5% during this period. The FTSE 100 Index (UKX-INDEX)(EWU) fell 0.3% while the CAC 40 Index (PX1-INDEX)(EWQ) fell 1.2% 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.

US crude oil inventories fell by 2.2 MMbbls (million barrels) and were at ~533.4 MMbbls in the week ending April 7, 2017, according to EIA (U.S. Energy Information Administration) data released on April 12, 2017. However, US oil production reached 9.23 million barrels per day in the week ending April 7, 2017—an increase of ~0.54 million barrels per day since November 2017. The rise in US oil production amounts to 45% of OPEC’s pledged output cuts.

The rise in oil prices between April 7 and April 13, 2017, coincides with the market belief that OPEC’s production cuts are working and that they might extend beyond the June 2017 end of the first deal.

But rising US oil production and demand concerns capped gains. On April 13, 2017, the IEA cut its crude oil demand growth forecast for 2017 to 1.3 million barrels per day—a reduction of 0.1 million barrels per day from its earlier forecast.

Oil rigs rose by 11 and were at 683 for the week ending April 14, 2017—the highest since May 1, 2015. Rising oil rigs could increase crude oil supplies.

Natural gas

Natural gas (UNG)(BOIL) May futures fell 1%, between April 7 and 13. They closed at $3.23 per million British thermal units on April 13—a rise of 1.3% from the previous trading session. Natural gas prices rose as traders closed bearish positions ahead of the long weekend. Earlier in the week, bearishness due to mild temperatures contributed to losses in natural gas prices.

Rising US oil rigs could also have a negative impact on natural gas prices. Natural gas rigs were at 162 for the week ending April 14, 2017.

Energy ETFs

Crude oil is an important driver for energy ETFs. Crude oil and natural gas sentiment 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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