Why the Momentum in Crude Oil May Be Short Lived



A short crude oil recovery?

February’s crude oil contract rose 4.6% in the seven days ended December 23. The major drivers of crude oil prices are falling crude oil inventories. The relative fall in crude oil inventories is high, but inventory is still at large from 2014 levels, and as always, prices are determined by demand and supply constraints. Moreover, markets are quite efficient at pricing any asset, and the past rise in the crude oil market since 2014 was followed by large falls. The reason being that OPEC[1. Organization of the Petroleum Exporting Countries] is still weighing on the fundamental of crude oil.

The chart above shows the trend in the crude oil market that was triggered by geopolitical and economic events in the past. The current event that’s leading to a fall in the price of crude oil since mid-2014 is the price war between OPEC and US shale producers.

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How the stocks reacted

Companies operating with a production mix that’s greater than 90% rose by an average 14%. This includes companies such as Vaalco Energy (EGY), Kosmos Energy (KOS), and Denbury Resources (DNR). In a week-to-date basis, these stocks rose by 16.8% as of December 23.

Other upstream companies, including Energy XXI (EXXI), Diamondback Energy (FANG), and others that are constituents of XOP and operate with a production mix of 70%–90% in crude oil, rose by 15.3% as of December 23. On a week-to-date basis, theses stocks rose by 14%. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) represents the US benchmark for exploration and production companies. Also, United States Oil (USO) rose by 4.6% as of December 23.

In the next part of the series, we’ll discuss the inventory data released by the U.S. Energy Information Administration.


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