On Thursday, US crude oil active futures fell 2.6% and settled at $55.3 per barrel. Since the closing level last week, US crude oil prices have fallen ~7.1% as of 3:51 AM ET on Friday. If US or WTI crude oil prices stay at the current levels until the end of the trading session, it will be the highest weekly decline for WTI crude oil since May 31. A buildup of 3.56 MMbbls (million barrels) in gasoline inventories compared to a Reuters poll for a decline of 1.45 MMbbls for the week ended July 12 could be dragging oil apart from concerns about an economic slowdown.
IEA doesn’t see large upside in crude oil
On Friday, Fatih Birol, the IEA’s executive director, said that any large upside in crude oil prices isn’t likely due to a possible economic slowdown dragging the demand and rising oil exports. The oil demand growth for 2019 is estimated to fall by 0.1 MMbpd (million barrels per day) from earlier estimates of 1.2 MMbpd. Although OPEC plus extended the production cut deal until 2020, the market expected a higher cut.
On average, US oil exports have risen by 0.9 MMbpd in 2019 compared to the previous year. The increase is approximately 78% of OPEC plus’s production cut. On Thursday, the US shot down an Iranian drone. However, Iran said that it didn’t lose a drone. Rising geopolitical tension in the Middle East didn’t boost oil prices. Even the Brent-WTI spread, which is sensitive to this kind of news, was at $6.88 on Friday—25 cents higher than the last trading session.
What does the implied volatility suggest?
On July 18, WTI crude oil’s implied volatility was 29.5%—3.7% below its 15-day average. The lower implied volatility might support oil prices. Since reaching a 12-year low in February 2016, WTI crude oil active futures have risen approximately 111%. Crude oil’s implied volatility has fallen ~60.8% since February 11, 2016.
Price forecast for WTI crude oil
Until July 25, WTI crude oil futures should close between $53.39 and $57.21 per barrel 68.0% of the time. The forecast uses crude oil’s implied volatility of 29.5% and assumes a normal distribution of prices. On Thursday, US crude oil September futures fell 2.6% and settled at $55.2 per barrel.
These price limits could be important for oil-tracking ETFs like the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12-Month Oil ETF (USL). If WTI crude oil closes near $50, it might concern investors in these ETFs. In the trailing week, oil active futures fell 8.1%, the ProShares Ultra Bloomberg Crude Oil ETF fell 15.2%, and the United States 12-Month Oil ETF fell 7.1%. These price limits also impact the S&P 500 Index (SPY). Energy stocks account for 5.2% of SPY.
Key events next week
The U.S. Energy Information Administration is scheduled to release its oil and natural gas inventory data on July 24–25. The data could be a short-term driver for oil and natural gas prices. Movement in the US dollar could also influence oil prices next week.
Based on the CME’s FedWatch Tool, there’s a 49.6% probability that the Fed will reduce the interest rates by 25 basis points. However, there’s a 50.4% probability that the Fed might reduce the interest rates by 50 basis points. On July 31, the Fed will announce its stance on interest rates.