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Crude Oil Prices Rise Due to Short Covering ahead of Expiry

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Crude oil prices rally

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.

September WTI (West Texas Intermediate) crude oil futures contracts trading in NYMEX rose by 1.79% and closed at $42.62 per barrel on August 18, 2015. Prices rose due to the consensus of falling US crude oil inventories. ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) mirrored the direction of US crude oil prices in Tuesday’s trade. These ETFs rose marginally by 1.15% and 1.05%, respectively, on August 17, 2015.

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September US crude oil futures contracts would expire on Thursday, August 20, 2015. So, some traders might have squared their short positions. This could have led to the surge in the crude oil prices in yesterday’s trade.

Likewise, the API (American Petroleum Institute) reported that the weekly crude oil inventories fell by 2.3 MMbbls (million barrels) for the week ending August 14, 2015. The consensus of falling crude oil stocks could benefit crude oil prices.

Crude oil prices rose despite the appreciating US Dollar Index in yesterday’s trade. The appreciating US dollar puts downward pressure on dollar-denominated crude oil prices.

On the supply side, record production from the US, Russia, Saudi Arabia, Iran, and Iraq will continue to put pressure on crude oil prices. The surge in global inventories and the African crude oil stockpile will also add pressure to crude oil prices.

On the demand side, the uncertainty of slowing demand from China, Europe, Japan, and the US could drag crude oil prices lower. Slowing seasonal demand and refinery maintenance could also curb the near-term demand for crude oil prices.

On a positive note, record imports from Asian majors like India and South Korea could support crude oil prices.

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Oil prices fell more than 20% YTD (year-to-date) due to oversupply concerns. The catastrophic fall in oil prices is leading to merger activity between the energy companies. PWC (Price Waterhouse Coopers) estimates that 47 deals—deal size more than $50 million—were announced in 2Q15 for $38.8 billion—compared to 39 deals worth $34.5 billion in 1Q15. There were 65 deals worth $48.9 billion in 2Q14. Most of the business deals were into the Midstream business segment—compared to the upstream business. The collateral damage in crude oil prices has impacted upstream players like Apache (APA), Hess (HES) and Marathon Oil (MRO) the most. They account for 4.40% of the Energy Select Sector SPDR ETF (XLE).

The Bloomberg Commodity Index is trading near a 13-year low due to the oversupply concerns across commodities. US WTI crude oil prices were the top performers in yesterday’s trade—compared to the other commodities.

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