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Are US Oil Producers Making Oil’s Rise a Bull Trap?

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Nov. 20 2020, Updated 1:46 p.m. ET

US crude oil

US crude oil (USO) (OIIL) (USL) (DBO) futures contracts for May delivery closed at $51.03 per barrel on April 4, 2017—1.6% above the previous day’s closing price. Prices rose because of talks about extending OPEC’s deal as well as rising seasonal demand for crude oil.

In the trailing week, US crude oil active futures rose 5.5%. During the same period, the Energy Select Sector SPDR ETF (XLE) rose 1.6%, while the S&P 500 Index (SPY) (IVV) (VNN) (SPX-INDEX) rose 0.1%. Energy accounts for 6.6% of the S&P 500 Index. Crude oil can impact broader markets.

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The S&P 400 Midcap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, rose ~0.3% during this period. Energy accounts for 6.4% of the Dow Jones Industrial Average Index (DIA) (DJIA-INDEX). The Dow was flat between March 28 and April 4. The FTSE 100 Index (UKX-INDEX) (EWU) fell 0.3%, while the CAC 40 Index (PX1-INDEX) (EWQ) rose 1.1% during this period. Oil and gas companies account for 14.1% of the FTSE 100 Index and 11.6% of the CAC 40 Index.

According to an EIA (U.S. Energy Information Administration) report, US onshore oil producers raised their capital expenditure by $4.9 billion, or ~72%, in 4Q16—compared to 4Q15. It was the highest YoY (year-over-year) change since 2012. The figure was calculated from 44 major oil companies’ financial statements. The report said that 73% of the companies witnessed a rise in their earnings on a YoY basis, while 50% of the companies already reduced their financial leverage near levels before oil’s downturn in 2014.

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Since OPEC’s production cut deal in November 2016, US oil production has risen by ~0.5 MMbpd—about 42% of OPEC’s pledged production cuts, according to the EIA’s weekly production data. These bearish drivers could make crude oil’s current supply glut situation worse. It would keep downward pressure on crude oil.

API inventories

On April 4, 2017, the API (American Petroleum Institute) reported a fall of ~1.8 MMbbls (million barrels) in crude oil inventories for the week ending March 31, 2017. It’s the first fall in API inventories since the week ending March 10. On April 5, 2017, the EIA will provide inventory data for the week ending March 31, 2017. Currently, crude oil inventories are at record levels.

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Key moving averages

Crude oil futures are now trading 3.1% below the 100-day moving average, but 3.8% above the 20-day moving average. Prices breaking above the 20-day moving average indicates short-term bullish sentiment. However, the 100-day moving average could be an important resistance on the upside.

Energy ETFs and series focus

It’s important to remember that crude oil–related sentiments impact ETFs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), and the ProShares UltraShort Bloomberg Crude Oil (SCO).

In this series, we’ll analyze how fundamental drivers such as the rig count, crude oil inventories, and the US dollar are impacting crude oil prices. We’ll also see what the crude oil futures forward curve and the Brent-WTI (West Texas Intermediate) spread might be indicating.

Let’s start by seeing how the oil rig count has been impacting oil prices.

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