Why Oil’s Potential Plunge Could Be Inevitable

US crude oil

US crude oil (USO) (OIIL) (USL) (DBO) futures contracts for June 2017 delivery closed at $45.88 per barrel on May 9, 2017—1.2% below the previous day’s closing price. In the trailing week, US crude oil June futures fell 3.7%. During the same period, the Energy Select Sector SPDR ETF (XLE) fell 0.1%, while the S&P 500 Index (SPY) (IVV) (VNN) (SPX-INDEX) rose 0.3%.

Why Oil’s Potential Plunge Could Be Inevitable

Crude oil is an important driver for global equities. In the trailing week, the Dow Jones Industrial Average (DJIA-INDEX) (DIA) rose 0.2%, while the S&P Mid Cap 400 Index (IVOO) (MID-INDEX) fell 0.4%. Overseas markers like the FTSE 100 Index (UKX-INDEX) (EWU) rose 1.3%, and the CAC 40 Index (PX1-INDEX) (EWQ) rose 1.8%.

Concerns about rising US crude oil production and high inventory levels have contributed to the fall in crude oil prices. (In Part 2 of this series, we will discuss the impact of US oil rigs on oil production. In Part 3 of this series, we will discuss oil inventories.)

On February 23, 2017, US oil closed at its 2017 high. Since then, US crude oil futures have fallen 15.7%. When securities fall more than 20%, they’re technically considered to have entered a bear market.

API inventories

On May 9, 2017, the API (American Petroleum Institute) reported a fall of ~5.8 MMbbls (million barrels) in crude oil inventories for the week ended May 5, 2017. The EIA (US Energy Information Administration) will provide inventory data for the week ended May 5, 2017, on May 10, 2017.

On May 10, 2017, at 4:16 AM EST, US crude oil June futures were trading at $46.31 per barrel, 0.9% above the previous settle price.

However, API reported a rise of ~3.2 MMbbls in gasoline inventories. If the EIA also reports a rise in gasoline inventories, it could be a concern for crude oil prices and would indicate that the glut in crude is being transformed into a glut in refined products.

Key moving averages

Crude oil June futures are now trading 13% below their 100-day moving average and 7.6% below their 20-day moving average. Remember, when prices are trading below key moving averages, it indicates bearish sentiments.

Continue to the next part for a discussion of the rising rig count.