Are Energy Commodities Entering a Bearish Zone?

Will US crude oil enter a bear market?

Since February 23, 2017, US crude oil (USO) (USL) (OIIL) (DBO) active futures have fallen 11.2%. They closed at $48.36 per barrel on June 1, 2017. On February 23, 2017, they closed at $54.45 per barrel, the highest closing price since July 6, 2015. Securities enter the bear market when they fall 20.0% from their peak.

Are Energy Commodities Entering a Bearish Zone?

OPEC’s (Organization of the Petroleum Exporting Countries) extension of production cuts has failed to raise oil prices. Currently, oil prices are more sensitive to US oil production, which has risen approximately 0.65 million barrels per day since OPEC’s first deal on November 30, 2016.

However, a falling crude oil inventories spread could bring some relief for oil bulls. For the week ended May 26, 2017, US crude oil commercial inventories fell for the seventh consecutive week by 6.4 MMbbls (million barrels) to 509.9 MMbbls.

Mild weather impacting natural gas prices

After closing at a five-and-a-half-month high on May 12, 2017, natural gas (UNG) active futures have fallen 12.2% as of June 1, 2017. With the start of what could be a mild summer, natural gas July futures fell 2.1% and closed at $3.01 per million British thermal unit on June 1, 2017.

Additions to inventories also came in above market expectations, which pressured natural gas prices on June 1, 2017. Based on the EIA’s (U.S. Energy Information Administration) natural gas inventories report, 81.0 Bcf (billion cubic feet) were added to existing inventory levels in the week ended May 26, 2017, compared to analysts’ estimate of 78.0 Bcf.

Bearishness in energy commodities and global equity indexes

In the trailing week, US crude oil active futures fell 1.1%, while natural gas futures fell 8.2%. However, major US equity indexes that have considerable exposure to the energy sector, such as the S&P 500 Index (SPY) (IWM) (SPX-INDEX) and the Dow Jones Industrial Average (DIA) (DJIA-INDEX) closed higher last week. They rose 0.60% and 0.40%, respectively, between May 25, 2017, and June 1, 2017. In Part 3 of this series, we’ll look at the exposure of these equity indexes to the energy sector and their correlations to crude oil.

The Energy Select Sector SPDR ETF (XLE) hasn’t been able to escape the fall in crude oil and natural gas prices, which fell 1.0% between May 25, 2017, and June 1, 2017.