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Crude Oil’s Recovery Could Be Difficult

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US crude oil last week

WTI (West Texas Intermediate) crude oil June futures closed at $46.22 per barrel on May 5, 2017—a 1.5% rise from the previous trading session. June futures for US crude oil (USO) (USL) (OIIL) (DBO) fell 6.3% on April 28–May 5, 2017.

During that period, the Energy Select Sector SPDR ETF (XLE) fell 0.8%, while the S&P 500 Index (SPY) (IWM) (SPX-INDEX) rose 0.6%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.3%. Energy accounts for 6.6% of the S&P 500 Index and 6.4% of the Dow Jones Industrial Average Index.

The S&P MidCap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, rose 0.3% during that period. Movements in crude oil can drive the broader equity markets. Crude oil is also an important driver for energy ETFs.

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US crude oil production and inventories

US crude oil inventories fell by 0.9 MMbbls (million barrels) to ~527.8 MMbbls in the week ending April 28, 2017, according to EIA (U.S. Energy Information Administration) data released on May 3, 2017. The fall was smaller than expected, which is bearish for prices. A rise of 0.2 MMbbls in motor gasoline inventories also added to the bearish sentiment for oil prices.

US oil production reached ~9.3 MMbpd (million barrels per day) in the week ending April 28, 2017—a rise of ~0.6 MMbpd since OPEC (Organization of the Petroleum Exporting Countries) made its production cut deal in November 2016. The rise in US oil production accounts for 49.6% of OPEC’s pledged output cuts. OPEC members will meet in Vienna on May 25, 2017, to discuss extending output cuts to 2H17.

Oil rigs rose by six to 703 for the week ending May 5, 2017—the highest since May 1, 2015. Rising oil rigs could increase crude oil supplies and pressure prices.

Natural gas

Natural gas (UNG) (BOIL) May futures fell 0.3% on April 28–May 5, 2017. They closed at $3.27 per million British thermal units on May 5—a rise of 2.5% from the previous trading session. However, EIA estimates suggest that lower temperatures this summer could hamper natural gas demand for power production.

Rising US oil rigs and natural gas rigs could also have a negative impact on natural gas prices. Natural gas rigs were at 173 for the week ending May 5, 2017—a rise of two rigs compared to the previous week. In the next part of this series, we’ll see how economic data and the US dollar could impact crude oil and natural gas prices.

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