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How Oil Prices Have Reacted to Oversupply Concerns

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Futures spread

On December 18, 2017, February 2018 futures were $2.34 higher than February 2019 futures. On December 11, the futures spread put February 2018 futures at a premium of $2.70. Between December 11 and December 18, 2017, US crude oil active futures fell 1.4%.

If the premium increases, oil prices may move higher. On November 24, 2017, the premium rose to $3.60 and US crude oil active futures were at their highest level in 2017. However, any reduction in the premium may reverse oil’s rise.

If the discount increases, oil prices may move lower. On June 21, 2017, the discount rose to $2.60 and US crude oil active futures were at their lowest level in 2017. Any reduction in the discount may help reverse oil’s fall.

Is the oil supply rising?

Between December 11 and December 18, 2017, the futures spread narrowed and oil prices fell. As discussed previously, rising US crude oil production could pose a threat to oil demand-supply dynamics, which could be a concern for the S&P 500 (SPY) and the Dow Jones Industrial Average (DIA).

Energy sector

The futures spread being at a premium may affect US oil producers’ (XOP) (DRIP) (IEO) risk management techniques differently than if it were at a discount. Midstream companies (AMLP) are also affected by these dynamics.

On December 18, February 2018 and February 2019 US crude oil futures contracts settled at progressively lower prices. The pattern could benefit ETFs that track oil such as the United States 12 Month Oil ETF (USL), the United States Oil ETF (USO), and the ProShares Ultra Bloomberg Crude Oil ETF (UCO).

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