Crude oil prices rise
This series analyzes crude oil prices and fundamentals. For an in-depth fundamental look at oil and gas and related companies, sectors, and drivers, please refer to our Energy and Power page.
NYMEX-traded WTI (West Texas Intermediate) crude oil futures contracts for September delivery rose by 2.80% and settled at $39.31 per barrel on Tuesday, August 25, 2015. Prices recovered despite oversupply concerns and weak demand cues. ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) followed US crude oil prices in yesterday’s trade. These ETFs rose by 1.92% and 3.24%, respectively, on August 25, 2015.
Short covering and bottom fishing
Short covering and bottom fishing might have supported crude oil prices in yesterday’s trade. Bearish traders might have squared their short positions and bullish traders might have taken fresh positions. They might have considered low oil prices as a buying opportunity.
The fundamental players might be eyeing the EIA’s (U.S. Energy Information Administration) inventory data. It’s expected to release on August 26, 2015. Yesterday, the API (American Petroleum Institute) reported that crude oil inventories fell by 7.3 MMbbls (million barrels) for the week ending August 21, 2015. The inventory data could benefit crude oil prices.
China market cues
On August 25, 2015, the People’s Bank of China—or China’s Central Bank— reduced the key lending rates by 25 basis points to 4.60%. It was a countermeasure to bring back investors’ confidence and Chinese stock market participants. China’s Central Bank reduced the interest rate for the fifth time since November 2014. The Chinese stock market fell around 40% from the peak of June 2015 due to the concerns of slowing economic growth.
A series of events—like the crashing stock market, currency devaluations, government stimulus, and contracting manufacturing data—is cementing that the Chinese recovery could be slower than expected. As a result, the crude oil market reacted strongly because China is the second largest importer and consumer of crude oil and other major commodities. The Chinese slowdown could mean a substantial fall in the demand for commodities.
US Dollar Index and crude oil
The US Dollar Index strengthened against the basket of currencies in yesterday’s trade. However, it fell against the yen for the second day. The US Dollar Index is expected to strengthen over the long term, but it would be volatile in the short term.
The rising supplies and inventory from the US to Russia will put pressure on the crude oil prices in the oversupplied market. The slowing demand due to seasonality and the economic slowdown among Asia’s heavyweights would also put pressure on crude oil prices.
The rise in crude oil prices benefits crude producers like Hess (HES), Murphy Oil (MUR), and Apache (APA). Combined, they account for 3.73% of the Energy Select Sector SPDR ETF (XLE). These stocks have a crude oil production mix that’s more than 49% of their production portfolio.