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Why Oil’s Decline Could Continue

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US crude oil

Between February 2 and February 9, 2018, US crude oil March futures fell 9.5% to close at $59.2 per barrel on February 9—the lowest closing price for US crude oil active futures since December 26, 2017. However, US crude oil futures may find support near the $59 level this week.

Over the same period, the United States Oil ETF (USO), the United States 12 Month Oil ETF (USL), and the PowerShares DB Oil ETF (DBO), which are all US crude oil–tracking ETFs, fell 9%, 8.1%, and 8.5%, respectively.

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According to the EIA’s (U.S. Energy Information Administration) weekly data, US crude oil production was above 10 million barrels per day (MMbpd) for the first time and was at a record high in the week ended February 2, 2018. Moreover, in the week ended February 9, 2018, the number of US oil rigs rose by 26 to 791—the highest level since April 10, 2015.

In the last week, the US dollar (UUP) has strengthened by 1.4%, which could be a negative development for US crude oil because oil prices are denominated in US dollars. A stronger US dollar makes oil costlier for oil-importing countries—a factor that could limit oil’s demand.

Apart from the US dollar, US equity indexes such as the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the S&P Mid-Cap 400 Index (IVOO) have fallen over 5% in the last week. A fall in the equity market could increase concerns about future economic growth, limiting oil’s upside.

Natural gas

Between February 2 and February 9, 2018, natural gas March futures fell 9.2%. During the same period, the United States Natural Gas ETF (UNG), which follows natural gas futures, fell 9%.

On February 9, natural gas futures settled at $2.58 per MMBtu (million British thermal unit), the lowest closing price for natural gas active futures since February 22, 2017. Disappointing EIA inventory data and moderating winter temperatures could be behind the fall in natural gas. However, this week, natural gas prices could find support near the $2.6 level.

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