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Crude Oil Market: Bottom Fishing and Short Covering

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Price range

NYMEX-traded WTI (West Texas Intermediate) crude oil futures contracts for September delivery were trading just above the key support of $42 per barrel on August 14, 2015. Prices have been fluctuating within the downward trending channel since last week. The appreciating US dollar and crude oil stocks could swing oil prices in the oversupplied crude oil market.

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Support and resistance

Bottom fishing, short covering, long-term lower crude oil prices, and the consensus of rising imports from India and South Korea could benefit US crude oil prices. Crude oil prices could see resistance at $52 per barrel. Prices tested this mark in July 2015. In contrast, record production from the Middle East to Russia could drag crude oil prices lower. Crude oil prices could see support at $40 per barrel. Prices hit this mark in January 2009.

Goldman Sachs estimates that crude oil prices could stay lower for several years due to the strong dollar and oversupply concerns. The EIA (U.S. Energy Information Administration) forecasts that US crude oil prices could average around $49 per barrel in 2015 and $54 per barrel in 2016. US crude oil prices could average around $48.50 per barrel in 2015 and $46.50 per barrel 2016, according to JPMorgan Chase’s forecast. The downtrend channel suggests that crude oil prices could average around $40–$50 per barrel in the short term.

ETFs like the ProShares Ultra Short Bloomberg Crude Oil ETF (SCO) benefit from lower crude oil prices. In contrast, ETFs like the Velocity Shares 3X Long Crude ETN (UWTI) are positively impacted by rising crude oil prices.

The uncertainty in the crude oil market impacts upstream players like Pioneer Resources (PXD), QEP Resources (QEP), and Devon Energy (DVN). Combined, they account for 5.44% of the Energy Select Sector SPDR ETF (XLE). These companies’ crude oil production is greater than 41% of their total production.

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