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Crude Oil Prices Rally Due to Short Covering, Weather Estimates

Gordon Kristopher - Author
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Aug. 18 2020, Updated 4:39 a.m. ET

Crude oil price: Highest single day gain in 2016 

March WTI (West Texas Intermediate) crude oil futures contracts trading in NYMEX rose by 11.2% and settled at $29.5 per barrel on January 21, 2016. This is the highest single-day rise for WTI prices in 2016. Brent crude oil futures also rose by 4.9% and closed at $29.3 per barrel. Oil prices rallied due to short covering and a cold weather forecast despite rising US crude oil inventory. ETFs like the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) also rallied in yesterday’s trade.

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Broader indexes like the SPDR S&P 500 ETF (SPY) also moved in the direction of crude oil.

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Short covering and cold weather 

WTI and Brent crude oil prices fell by 28% in 2016 and tested 2003-lows as of January 20, 2015. In turn, that led to bargain buying by bullish traders and short covering by bearish traders. So, prices rose exponentially in yesterday’s trade.

A cold weather forecast in the United States and Europe also boosted crude oil prices. Cold weather will likely drive the heating demand and support oil and gas prices. Weather is expected to be freezing, and snowstorms are expected in the eastern coasts of the United States and several parts of Europe, including Germany. Additionally, cold weather could last for the next ten days. However, the scaling of production from Iran and an appreciating dollar should continue to put pressure on crude oil prices.

The European Central Bank

The European Central Bank suggests it would inject more money in the market though its stimulus program in March 2016 for growth and better economic activity. Cheaper credit facilities would boost economic activity and demand for crude. The crude oil market reacted to this as crude oil prices rose in yesterday’s trade. In contrast, the slowing economic activity in China, Russia, and Brazil is also putting pressure on the global market.

Historic low prices

The US crude oil prices fell almost 20% in 2016. They fell by 53% in 2015 and have fallen more than 70% since June 2014. Record low oil prices benefit oil refiners like Tesoro (TSO), Valero Energy (VLO), and Phillips 66 (PSX). On the other hand, they negatively affect the profitability of oil producers like Murphy Oil (MUR), Devon (DVN), ConocoPhillips (COP), and Pioneer Natural Resources (PXD).  

The WTI and Brent spread is at $0.28 per barrel as of January 21, 2016, on the market’s closing. You can refer to Why WTI Crude Oil Could Trade at a Premium to Brent Oil in 2016 for more. Read the latest update of the EIA’s (U.S. Energy Information Administration) crude oil inventory report released yesterday in the next part of the series.

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