12 Feb

Crude Oil Prices Fall: Saudi Arabia Is Waiting for the Kill

WRITTEN BY Gordon Kristopher

Crude oil prices fall 

March WTI (West Texas Intermediate) crude oil futures trading in NYMEX fell for the sixth consecutive day by 4.5% and settled at $26.21 per barrel on February 11, 2016. Similarly, Brent crude oil prices fell by 2.5% and closed at $30 per barrel. Oil prices fell due to the rise in Cushing and refined products’ stocks. Also, there were more doubts about the OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC collective crude oil production cut. The United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) diverged from the direction of crude oil prices on February 11. The SPDR S&P 500 ETF (SPY) moved in the direction of oil prices in yesterday’s trade.

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OPEC and non-OPEC ties

The UAE’s energy minister reported that OPEC would be interested in a coordinated production cut among OPEC and non-OPEC members after a meeting. However, speculation of a collective production cut increased volatility in the global crude oil market in 2016. There hasn’t been concrete evidence of a collective production cut or discussion. Countries including the UAE, Russia, and Venezuela have been in favor of curbing crude oil production. The supply shrinkage could motivate higher oil prices. Oil exporting giants could benefit from higher oil prices. However, countries like Saudi Arabia suggest that curbing production could boost oil prices. Oil prices’ short-term rally could support US shale oil producers to ramp up production and sustain the depressed energy market. As a result, they’re going for a kill. US shale operators like Laredo Petroleum (LPI), Whiting Petroleum (WLL), and Ultra Petroleum (UPL) would never recover. They would go bankrupt or abandon the oil business. US oil producers shut down their production due to higher break-even costs and production costs. For more on US energy companies’ financial woes, read US Oil and Gas Companies’ Debt Exceeds $200 Billion.

Depressed energy market

Oil prices are trading close to 12-year lows. WTI oil prices fell for the sixth straight day. The fall in crude oil prices impacts US upstream players like CONSOL Energy (CNX), Concho Resources (CXO), and PDC Energy (PDCE). The roller coaster ride in oil prices also impacts oil and gas ETFs and ETNs like the VelocityShares 3X Inverse Crude Oil ETN (DWTI) and the iShares U.S. Energy (IYE).

Scaling up production from Iran and concerns about whether Russia and OPEC will join each other to cut the crude oil production will continue to put pressure on oil prices.

US inventory  

The U.S. Energy Information Administration released its weekly petroleum status report on February 10, 2016. Read the next part of the series for the latest update on Cushing and nationwide stocks.

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