Crude oil prices fall
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 October delivery fell slightly by 0.53% and closed at $46.90 per barrel on Thursday, September 17, 2015. Prices fell as the Fed delayed the rate hike on the consensus of the slowing Chinese economy and low US inflation. ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) mirrored the direction of crude oil prices in yesterday’s trade. These ETFs fell by 0.85% and 1.60%, respectively, at close of trade on September 17, 2015.
On September 17, 2015, the Fed didn’t change the interest rate. It stayed at zero. The global markets’ volatility, Chinese economic slowdown, and low US inflation figures supported the cause for keeping the interest rate the same. Oil markets reacted slightly to the Fed’s decision. The rise in the interest rate might send strong signals of economic growth. However, the delay in rate hike suggests a possible dent in the US economy. The US and China contribute to 30% of the global crude oil consumption. Any possible negative news from these countries could ignite long-term oversupply sentiments.
Meanwhile, the EIA (U.S. Energy Information Administration) published its weekly petroleum status report on September 15, 2015. The government data showed that the US crude oil inventory fell by 2.1 MMbbls (million barrels) for the week ending September 11, 2015. Likewise, the API (American Petroleum Institute) reported that the US crude oil stockpile fell by 3.1 MMbbls for the same period.
US Dollar Index
The latest data compiled from Bloomberg showcased that the 120-day correlation between the US Dollar Index and WTI crude oil was nearing zero as of the third week in September 2015. The inversely correlated WTI and US Dollar Index have mainly been negative in the last decade. The correlation was at 0.011 as of September 15, 2015. It suggests a feeble impact of US Dollar Index on the dollar-denominated crude oil. It also suggests that oversupply concerns and weak demand cues are driving crude oil prices.
Weak demand consensus
The beginning of seasonal maintenance of crude oil refineries in the US will curb the average demand of crude oil in the near term. Likewise, the ending of the peak summer driving season will also negatively influence crude oil prices.
The fight for crude oil market share by OPEC (Organizational of the Petroleum Exporting Countries) and economic growth concerns will play a pivotal role in the crude oil market. The speculation of slowing economic growth from China, Russia, Brazil, Europe, and Japan will play a larger role in the global crude oil consumption in the oversupplied market.
The oversupply factors have led to the fall in crude oil prices. Price fell more than 50% since June 2014. The long-term downward trend of crude oil prices impacts the margins of US crude oil heavyweights like Chevron (CVX) and ExxonMobil (XOM). Chevron and ExxonMobil posted their lowest profits in the last several years. Oil majors like BP (BP) expect crude oil prices to hover around lower levels for the long term.
Crude oil prices have recovered almost 25% from the 6.5-year lows of $37.75 in August 2015. Is this a temporary recovery or crude oil prices entering a bull market. The slowing US production and falling inventory say that there’s a marginal improvement in fundamentals. However, the roller coaster ride of crude oil prices says that there’s more pain for the oil market. Prices fell more than 10% YTD (year-to-date) due to oversupply concerns.