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Crude Oil Prices Fall Again Due to the Chinese Slowdown

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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.

September WTI (West Texas Intermediate) crude oil futures contracts trading in NYMEX fell by 7.70% and closed at $45.41 per barrel on September 1, 2015. Prices fell due fears of a Chinese slowdown. They also fell due to estimates of rising crude oil inventory data. The US benchmark following ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) followed crude oil’s price direction in Tuesday’s trade. These ETFs fell by 6.80% and 13.65%, respectively, on September 1, 2015.

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Inventory consensus

On September 1, 2015, the API (American Petroleum Institute) published the weekly crude oil stockpile report. The data showed that crude oil stocks rose by 7.6 MMbbls (million barrels) for the week ending August 28, 2015. The rising crude oil stocks put pressure on crude oil prices.

The EIA (U.S. Energy Information Administration) will release the weekly petroleum status report on September 2, 2015. All eyes will be on the EIA’s crude oil inventory report.

Chinese fear factor

The global concerns about a Chinese slowdown are sending negative cues to the crude oil market. China is the second largest consumer of crude oil in the world. The latest Chinese manufacturing data fueled speculation of a Chinese economic slowdown as the data hit a multiyear low. In the US, growth in the manufacturing sector hit a two-year low. The manufacturing sector’s growth indicates healthy economic growth. The data raise concerns about the long-term demand of crude oil from the top crude oil consumers like China and the US.

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US Dollar Index

The US Dollar Index depreciated against the basket of currencies in yesterday’s trade. However, crude oil prices hadn’t reacted to the weak dollar. The negative sentiments of slowing demand and the inventory buildup weighed on crude oil prices.

OPEC and Iran

OPEC (Organization of Petroleum Exporting Countries) continued to maintain its collective output at 30 MMbpd (million barrels per day) in its last meeting in June 2015. The speculation is mounting across the crude oil market that OPEC might be interested in a discussion with non-OPEC players to curb crude oil production. However, there isn’t a clear indication from OPEC regarding these matters. You should remember that Iran is planning to pump more because the oil sanction could ease. This could put downward pressure on crude oil prices.

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Volatility analysis

Crude oil prices rose from $38.60 per barrel on August 26 to $49.20 per barrel on August 31. In these three days, oil prices rose almost 27% and then fell by almost 8% yesterday. The volatility in crude oil prices impacts crude oil majors like Chevron (CVX), ExxonMobil (XOM), and Occidental Petroleum (OXY). They account for 32.22% of the Energy Select Sector SPDR ETF (XLE). These companies have a crude oil production mix that’s more than 49% of their production portfolio.

The volatility in prices was due to short covering, bottom fishing, and estimates of a fall in US crude oil production. This is the highest three-day rally since 1990. It means crude oil prices have technically entered a bull market. However, crude oil prices fell more than 15% YTD (year-to-date) due to oversupply concerns.

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