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Oil’s Fall: A Concern for Investors in Energy Stocks?

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US crude oil

On April 16, 2018, US crude oil May futures fell 1.7% from the highest closing level for US crude oil active futures in more than three years. On April 13, 2018, US crude oil May futures settled at $67.39 per barrel. On April 16, US crude oil May futures settled at $66.22 per barrel.

Oil prices fell due to easing geopolitical factors. The rise in the oil rig count could have dragged oil prices down.

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Investors in energy stocks

On April 16, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) rose 0.7% and 1%. On the same date, among our list of oil-weighted stocks, only Whiting Petroleum (WLL), Hess (HES), and Murphy Oil (MUR) closed in the red. On April 16, 2018, these three stocks fell 1.1%, 0.1%, and 0.1%, respectively.

On April 16, 2018, the S&P 500 Index rose 0.8%. In fact, all of the SPDR ETFs that break up the broad market’s performance into subsectors closed in the green on the same date. Easing geopolitical factors after US-led air strikes in Syria on April 13, 2018, helped equity markets rise.

So, the push from the equity markets could have helped most of the energy stocks rise despite the fall in oil prices on April 16. General equity market sentiment can impact stocks in the short term despite underlying long-term fundamental drivers.

EIA’s report

On April 16, 2018, the EIA’s Drilling Productivity report was released. Based on the report, by May 2018, the US crude oil production from the major US shale regions could reach ~7 MMbpd (million barrels per day)—34.7% higher on a YoY (year-over-year) basis. In fact, 45.5% of the growth in US crude oil production on a YoY basis could be from the Permian region.

However, constraints on the pipeline capacity from the Permian Basin could be a bottleneck for US crude oil output. The difference between WTI (West Texas Intermediate) prices at Houston and at Midland expanded close to $9 per barrel—a record level based on the IEA’s Oil Market report released on April 13, 2018. Houston is the export point, while Midland represents the price of crude oil produced in the Permian Basin.

Moving averages

On April 9, 2018, US crude oil active futures were 2.7%, 5.3%, 7.5%, and 18.9% above their 20, 50, 100, and 200-day moving averages, respectively. US crude oil active futures trading above all of these moving averages across various timeframes is a bullish signal for prices.

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