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Will the Energy Sector Enter a Bear Market?

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US crude oil prices

On March 23, 2017, US crude oil (DBO) (OIIL) (USL) (SCO) futures contracts for May delivery closed at $47.70 per barrel—an ~0.7% fall over the previous trading session. Crude oil futures have fallen 12.4% since their 18-month high of $54.45 per barrel on February 23, 2017. When securities fall more than 20%, they’re technically considered to have entered a bear market. From March 16, 2017, to March 23, 2017, US crude oil futures contracts for May fell 3.1%.

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Concerns about rising US oil production and global oil inventories weighed on oil prices. US crude oil inventories reached ~533.1 MMbbls (million barrels) in the week ending March 17, 2017—record highs, according to EIA (U.S. Energy Information Administration) data released on March 22, 2017. In the last five trading sessions, WTI crude oil May futures traded between $47.01 and $49.31 per barrel. During the same period, the S&P 500 Index (SPY) (SPX-INDEX) fell 1.4%, while the Dow Jones Industrial Average (DIA) (DJIA-INDEX) fell 1.3%. The tech-heavy NASDAQ Composite (QQQ) (COMP-INDEX) fell 1.4% during this period.

Crude oil futures

Currently, active crude oil futures are trading at a discount of $2.03 to the 12-month futures contract. On March 22, 2017, active oil futures were trading at a discount of $1.98 to the futures contract 12 months ahead. The rise in the futures spread, along with the drop in active futures prices on March 23, could point to investors’ concerns about the crude oil demand-supply balance.

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Natural gas prices

Natural gas (UNG) April futures rose 5.1% from March 16, 2017, to March 23, 2017. On March 23, 2017, natural gas active futures rose 1.3% and closed at $3.05 per MMBtu (million British thermal units). On the same day, the EIA announced bullish natural gas inventory data for the week ending March 17, 2017. We’ll discuss natural gas inventory data in Part 3 of this series.

Earlier that same week, cooler weather forecasts contributed to the rise in natural gas prices. Natural gas traded between $2.88 and $3.1 per MMBtu in the past five trading sessions. As we’ll see later in this series, bullishness in natural gas may not be able to prevent the bear market that’s likely coming in the energy sector.

Performances of energy ETFs

Here’s how some energy ETFs performed between March 16 and March 23, 2017:

  • The Energy Select Sector SPDR ETF (XLE) fell 2%.
  • The Alerian MLP ETF (AMLP) fell 1.2%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 3.8%.
  • The VanEck Vectors Oil Services ETF (OIH) fell 2.6%.

Understanding ETF performances

In the following parts of this series, we’ll try to understand what drove the performances of the previously mentioned energy ETFs as well as others. First, let’s take a look at the performance of the United States Oil ETF (USO).

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