Why Is Crude Oil Falling Sharply?



US crude oil

US crude oil (UWTI) (USO) (OIIL) (USL) (SCO) (DWTI) December futures fell 9.5% in the week ending November 4, 2016, on a closing price basis. WTI (West Texas Intermediate) crude oil closed at $44.07 per barrel on November 4—an ~1.3% fall from the previous trading session.

US crude oil fell on November 4, 2016, on news that OPEC (Organization of the Petroleum Exporting Countries) members weren’t able to reach agreements on production cuts. The OPEC deal was an important driver for crude oil prices in October. US crude oil active futures fell 2.9% for the month. On October 19, 2016, US crude futures touched a 2016 high of $51.60 per barrel on a closing price basis. Currently, crude oil prices are 14.6% below their 2016 high. Earlier in the week, crude oil prices were impacted by the record increase in US crude oil inventories.

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Gold last week

Gold futures (GLD) rose 2.2% from October 28 to November 4. The rise in gold prices corresponds to a 1.3% fall in the US Dollar Index and the rise in uncertainty surrounding the US presidential election. In the last five trading sessions, gold had a correlation of -68.3% with the US Dollar Index (UUP).

The gold-to-oil ratio stood at 29.6x on November 4, 2016. On October 10, 2016, it reached 24.5x—its lowest level for 2016. Currently, the ratio is 20.9% above its 2016 low. On October 10, 2016, crude oil futures were at their 2016 highs. The recent rise in the ratio indicates changes in market sentiment from growth-driven commodities towards safe-haven assets. Gold is a safe-haven asset. It generally gains during times of economic and financial market uncertainty. Crude oil is a risk asset. It generally gains when economic growth and demand prospects look good.


Crude oil–related sentiment also impacts ETFs and ETNs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the DB Crude Oil Double Short ETN (DTO), the iShares US Oil Equipment & Services ETF (IEZ), the Fidelity MSCI Energy Index ETF (FENY), the United States Oil ETF (USO), the Credit Suisse X-Links WTI Crude Oil ETN (OIIL), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

In the next part of this series, we’ll look at how the economic data and the US Dollar Index can impact crude oil prices.


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