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Memo to Energy Investors—Watch for Rising Crude Oil Production

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Memo to Energy Investors—Watch for Rising Crude Oil Production PART 1 OF 5

Are Traders Turning a Blind Eye to Rising Crude Oil Production?

US crude oil futures

On July 13, 2017, US crude oil (USO) (DBO) August futures closed at $46.08 per barrel—1.3% above the previous day’s closing price. The International Energy Agency’s1 optimistic demand estimate boosted oil prices on that day.

The IEA raised its year-over-year global demand growth estimate to 1.5 MMbpd (million barrels per day) in 2Q17, from 1.0 MMbpd in 1Q17. Earlier in the week, oil prices rose due to a fall of ~7.6 MMbbls in crude oil inventories for the week ended July 7, 2017. The IEA released this inventory data on July 12, 2017.

Are Traders Turning a Blind Eye to Rising Crude Oil Production?

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OPEC and US crude oil production

Based on OPEC’s monthly report released on July 12, 2017, the cartel’s total crude oil production stood at ~32.6 MMbpd in June 2017. OPEC’s production level was above the mutually agreed ceiling of 32.5 MMbpd in the OPEC production cut deals made in November 2016 and May 2017.

However, Libya, Iraq, and Nigeria were mostly behind the rise of ~0.4 MMbpd of crude oil production on a month-over-month basis in June 2017. Libya and Nigeria are exempt from the production cut deal. Apart from OPEC’s crude oil production, US crude oil production surged to ~9.4 MMbpd in the week ended July 7, 2017, which was the highest since the week ended August 7, 2015. These two bearish factors could cap the gains in oil prices.

Oil and the broader market

Between July 6 and July 13, 2017, US crude oil August futures rose 1.2%. During the same period, the S&P 500 Index (SPX-Index) and the Dow Jones Industrial Average (DJIA-Index) rose 1.6% and 1.1%, respectively.

The gains in the broader market were similar to those of US crude oil futures. We will discuss the relationship between crude oil and equity indexes in Part 2 of this series.

Natural gas futures

On July 13, 2017, natural gas (UNG) August futures settled at ~3.0 MMBtu (million British thermal units) after falling 0.8%. Natural gas inventories rose by 57 Bcf (billion cubic feet), just below the market expectation.

The IEA reported natural gas inventory data on July 13, 2017. During that week, natural gas prices gained 2.5% due to higher temperature forecasts. However, the recent surge in US crude oil production could be a worry for natural gas bulls.

  1. IEA
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