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Has Oil’s Downfall Started?

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Dec. 4 2020, Updated 10:43 a.m. ET

US crude oil

On February 8, 2018, US crude oil’s March 2018 futures fell 1% and closed at $61.15 per barrel. ETFs that replicate US crude oil futures’ returns like the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 2.3% and 4.4% on the same day.

On February 8, 2018, the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) fell 3.8% and 4.1%. In the trailing week, these equity indexes fell in four out of five instances. US crude oil futures were also in the red in all four instances. During this period, the S&P 500 Index and the Dow Jones Industrial Average Index fell 8.5% and 8.9%, while US crude oil futures fell 7.1%.

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The fall in broader equity markets also dragged the oil market lower. The fall can occur due to general bearish sentiment causing investors to cut long positions across markets. Lower growth expectations in the future, reflected in falling stock markets, cause bearishness in oil prices. In the next part, we’ll discuss the correlation between oil and equity indexes.

Rising gasoline inventories and US crude production exceeding 10 MMbpd (million barrels per day) could be dragging oil prices down.

Natural gas

On February 8, 2018, natural gas March 2018 futures fell 0.2% and closed at $2.697 per MMBtu (million British thermal units). In the week ending February 2, 2018, the EIA (U.S. Energy Information Administration) reported a fall of 119 Bcf (billion cubic feet) in natural gas inventories—3 Bcf more than the market’s expectation. On the same day, natural gas prices closed in the red. Natural gas prices might have fallen due to the contraction in the negative difference between natural gas inventories and their five-year average.

In the week ending February 2, 2018, the inventories spread was at -15.9%—30 basis points higher than a week ago. The inventories spread and natural gas prices usually move in opposite directions. In the trailing week, natural gas prices fell 5.6%.

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