Why Oil’s Rally Is Cooling


Nov. 20 2020, Updated 4:27 p.m. ET

US crude oil

Between May 18 and May 25, US crude oil July futures fell 4.9%—the steepest weekly decline since February 9. On May 25, US crude oil July futures settled at $67.88 per barrel—their first time below the $70.00 level since May 8.

The US dollar rose 0.6% last week—a factor that could have dragged oil prices. The PowerShares DB US Dollar Bullish ETF (UUP), which tracks the US dollar, rose 0.6% during this period.

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In the same week, the futures for gasoline and heating oil fell 2.5% and 2.4%, respectively. However, gasoline and heating oil futures outperformed oil prices. The United States Gasoline Fund LP ETF (UGA) fell 2.8% during this period. The iShares S&P GSCI Commodity-Indexed Trust ETF (GSG) fell 1.4% in the week ended May 25. GSG has ~63.5% exposure to the energy sector. The fall in oil prices could be a factor in GSG’s fall.

Why oil’s rally is cooling

On May 21, US crude oil July futures settled at $72.35 per barrel—the highest closing level for active US crude oil futures since November 26, 2014. However, market concerns for a possible rise in oil supplies from Russia and Saudi Arabia were behind the steep decline in oil prices last week.

Last week, Brent crude oil July futures fell 2.6%—2.3% less than US crude oil futures’ decline. WTI crude oil’s underperformance could result from rising US crude oil production. The United States Brent Oil Fund (BNO), which tracks Brent crude oil futures, fell 2.9% during the same period.

In the week ended May 25, the Brent-WTI spread expanded by $1.40 to $8.56 per barrel—the highest since March 20, 2015. The widening of the Brent-WTI spread could benefit US oil exporters—a negative development for oil prices.

Natural gas

Between May 18 and May 25, natural gas July futures rose 2.9% and settled at ~$2.96 per million British thermal units on May 25—the highest closing level since January 31. In the week ended May 25, the United States Natural Gas ETF (UNG) rose 3.4%. The bullish weather forecast report could increase the expectations for natural gas’s cooling demand—a positive development for natural gas prices.


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