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What Has Deteriorated Oil’s Prospects?

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Nov. 20 2020, Updated 11:21 a.m. ET

US crude oil

On July 16, US crude oil August futures fell 4.2% and settled at $68.06 per barrel—their lowest closing level since June 21.

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Energy stocks and ETFs

The downturn in oil prices could negatively impact energy stocks. On July 16, oil-weighted stocks Pioneer Natural Resources (PXD), EOG Resources (EOG), and Apache Corporation (APA) fell 0.8%, 0.9%, and 3.1%, respectively.

On the same date, the Energy Select Sector SPDR ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 1.2% and 2%, respectively. These ETFs hold energy stocks.

What deteriorated oil’s prospects?

The sharp fall in oil prices in the last trading session was the result of US Treasury Secretary Steven Mnuchin’s statement that the United States might consider waivers for countries importing oil from Iran. Further, some European nations are exploring ways to keep the financial channel open with the Iranian Central Bank, according to a report by the Wall Street Journal. This development could mean the continued availability of Iranian oil supply.

On the same date, the EIA (U.S. Energy Information Administration) released its Drilling Productivity Report. The report estimates that US crude oil production from major US shale regions will grow to 7.47 million barrels per day in August—a record level.

Moreover, market concerns surrounding a rise in Saudi Arabian and Russian oil output and trade war fears may further deteriorate oil’s prospects.

US crude oil prices closed just at the lower limit of our price forecast of $68.07 per barrel until July 20. However, the intensifying oil workers’ strike in Norway could spell trouble for oil bears. News surrounding any unplanned supply disruption could cause large spikes in oil prices.

Moving averages

On July 16, 2016, US crude oil active futures were 1.7% and 9.1% above their 100-day and 200-day moving averages, respectively. However, on the same day, US crude oil prices fell 3.4% and 2% below their 20-day and 50-day moving averages, respectively. Prices falling below the shorter-term moving average could indicate short-term bearishness in oil prices.

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