Crude oil price rally
February WTI (West Texas Intermediate) crude oil futures contracts rose by 2% and were trading at $37.81 per barrel in the early hours of Asian trade today. Brent crude oil rose by 1.5% and was trading at $38.19 per barrel this morning. Oil prices rose due to short covering and bargain buying. The WTI-Brent spread was trading at a premium this morning after trading at a discount in December 2015 due to the lifting of the US crude oil export ban. Oil-tracking ETFs like the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) usually follow the price trend of crude oil prices.
Crude oil’s monthly and yearly price movement
WTI crude oil, the US benchmark for crude oil, fell 11% in December 2015 and 30% in 2015. This is the second consecutive loss for WTI crude oil prices since 1998. Similarly, Brent crude oil, the global benchmark, fell 16% in December 2015 and 35% in 2015—the third straight yearly loss. Record production from the United States and OPEC (Organization of the Petroleum Exporting Countries) dragged crude oil prices lower in 2015. WTI and Brent oil prices are trading close to 2009 and 2004 lows, respectively. For more on crude oil price lows, read Why History Suggests that Crude Oil May Be Low for Next 2 Decades.
Record-low prices benefit US refiners like Phillips 66 (PSX) and Valero Energy (VLO). However, historic low crude oil prices affect the profitability of upstream players like Hess (HES), Marathon Oil (MRO), EOG Resources (EOG), and Apache (APA).
China’s manufacturing index
China’s Caixin PMI (purchasing managers’ index) was released today and fell to 48.2 in December 2015, as compared with estimates of 48.9 for the same period. Chinese manufacturing activity contracted for the fifth straight month. This suggests that Chinese economic activity is slowing down. China is the second largest importer and consumer of crude oil. Read more about Chinese oil imports in the next part of this series.
Iran is optimistic about crude oil prices in 2016. This suggests that despite the excess oil that will flood the market in 2016, oil prices may not fall further, as most of the negative fundamental factors have been factored into current prices. Iran estimates that there will be a global oversupply of 2.5 MMbpd–3 MMbpd (million barrels per day) in 2016. However, oil price wars and new strategies to obtain customers may put pressure on oil prices in 2016.
In its latest report, the U.S. Commodity Futures Trading Commission, or CFTC, stated that hedge funds have increased their bearish positions near record highs, and long positions are at their highest level in five years. Bearish oil prices are also weighing on broader indexes like the S&P 500 Index (SPY).
In this series, we’ll also analyze oil demand from China, Russian production levels, and the US rig count.