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Crude Oil and Natural Gas: Key Quantitative Drivers

PART:
1 2 3 4
Crude Oil and Natural Gas: Key Quantitative Drivers PART 1 OF 4

Why Crude Oil Looks Bullish and Natural Gas Looks Bearish

US crude oil last week

On May 18, 2017, WTI (West Texas Intermediate) crude oil July futures closed at $49.66 per barrel. They rose 0.5% compared to the closing price on May 17. Between May 11 and May 18, 2017, July futures for US crude oil (USO) (USL) (OIIL) (DBO) gained 3%.

Why Crude Oil Looks Bullish and Natural Gas Looks Bearish

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What caused the rise in oil prices?

A possible nine-month extension to OPEC production cuts could drain the high level of global inventories. OPEC members are set to meet in Vienna on May 25, 2017, which has helped maintain the bullish momentum in crude oil prices. Plus, bullish EIA inventory data also supported prices.

Why oil traders should stay alert

Crude oil traders should stay cautious of rising US crude oil production. Though US crude oil production fell marginally for the first time in 12 weeks in the week ended May 12, 2017, shale-based production still expanded and is expected to keep rising as long as crude oil prices remain at an elevated level. US production is currently above the 9.3 million barrels a day mark. That’s a rise of ~0.61 million barrels per day since the OPEC deal, or 50.6% of OPEC’s targeted production cut.

Broader market performance

Between May 11 and May 18, the Energy Select Sector SPDR ETF (XLE) fell 1.1%, while the S&P 500 Index (SPY) (IWM) (SPX-INDEX) fell 1.2%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) fell 1.1%. Energy companies account for 6.6% of the S&P 500 Index and 6.4% of the Dow Jones Industrial Average.

The S&P MidCap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, fell 1.8% during that period. We’ll discuss how crude oil is crucial to broader equity markets in part three of this series. Apart from the broader market, crude oil also drives energy ETFs.

Natural gas

Between May 11 and May 18, 2017, natural gas (UNG) (BOIL) June futures fell 5.7%. Natural gas active futures closed 0.3% below the previous trading session at $3.18 per million British thermal units on May 18. On the same day, the EIA (U.S. Energy Information Administration) reported that there was an addition of 68 Bcf (billion cubic feet) to natural gas (GASX) inventories in the week ending May 12, 2017.

Analysts had predicted a rise of 61 Bcf. Natural gas prices fell because the rise in inventories was above market expectations. A mild weather forecast was another bearish driver for natural gas in the trailing week. Apart from the above factors, natural gas investors should watch developments in the oil and natural gas rig counts.

In the next part, we’ll discuss how economic data could impact crude oil and natural gas demand and prices.

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