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Crude Prices Fell Again Due to Long-Term Oversupply Concerns

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Crude oil prices fell

NYMEX-traded WTI (West Texas Intermediate) crude oil futures for March delivery fell by 3.67% and closed at $29.64 per barrel on February 19, 2016. Similarly, Brent crude oil prices trading in ICE fell by 3.7% and closed at $33 per barrel. Oil prices fell due to the rising US crude oil inventory and long-term oversupply concerns. ETFs such as the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) moved in the direction of crude oil prices. They fell by 1.3% and 2.2%, respectively, on February 19. The SPDR S&P 500 ETF (SPY) was almost flat on Friday’s trade.

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New crude oil production alliance

On February 16, 2016, Russia, Saudi Arabia, Venezuela, and Qatar decided to freeze crude oil production at January 2016 levels. Countries like Kuwait and Iraq supported the deal. Even countries like Iran stated that they would support the deal. But, they didn’t comment on a production ceiling.

Saudi Arabia hinted that it was taking initial steps towards a bigger strategy for stabilizing the oil market. The Energy Ministry of Russia suggested that the talks about freezing production would be finished by March 1, 2016. The talks will pave the way for more production cuts in the future. The time duration still isn’t clear. To learn more about the historic deal, read Why Crude Oil Prices Fell despite the OPEC and Non-OPEC Deal. Also read, Why US Crude Oil Production Slowdown Is Pivotal for OPEC.

The tussle for market share and resilience of the US crude oil production slowdown could delay oil producers’ decision to curb oil production so that US production finally shuts down. To learn about crude oil production levels, read Saudi Arabia’s Crude Oil Production: Key for the Global Oil Market and Russia’s Production Will Put More Pressure on the Crude Oil Market. Countries that depend on oil exports, like Saudi Arabia and Russia, could devalue their currency to offset lower oil prices until the beginning of the production cut or slowdown.

Crude oil price volatility and expiry 

March WTI crude oil futures contracts will expire on February 22, 2016. Traders are in a selling mode ahead of the crude oil futures contracts’ expiry. Crude oil prices have fallen more than 20% in 2016. They fell almost 70% in the last 20 months due to oversupply concerns. The S&P GSCI Energy Index has also fallen 11% in 2016. Read Why did Crude Oil Volatility Index Test a Record High? to learn more. Record low oil prices impact oil producers like Energy XXI (EXXI), Halcon Resources (HK), and SM Energy Company (SM). On the other hand, lower oil prices reduce oil refiners’ input cost such as Western Refining (WNR), Marathon Petroleum (MPC), and Northern Tier Energy (NTI). Read more about the bearish catalysts, US Cushing crude oil stocks and the nationwide crude oil inventory, in the next part of the series.

The roller coaster ride in oil and gas prices impacts ETFs such as the VanEck Vectors Global Oil Refiners ETF (CRAK), the First Trust Energy AlphaDEX ETF (FXN), the Direxion Daily Energy Bull 3X ETF (ERX), and the Vanguard Energy ETF (VDE).

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