So far in July, US or WTI crude oil prices have risen about 5% on an average closing price basis. The United States Oil Fund LP (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) have risen 4.9% and 8.9%. USO and UCO follow WTI crude oil prices. So far, WTI crude oil has experienced the largest gain for this time of the year since 2015. In the last five years, WTI crude oil was usually seen at the strongest level in July.
Oil prices in August
Last weekend, the talks ended positively between the West and Iran. If the talks are successful, there could be more weakness in oil prices early in August. The security issues for tankers passing through the Strait of Hormuz added upside in oil. Apart from geopolitical tensions, the inventories spread fell sharply on a month-over-month basis. The inventories spread is the difference between US crude oil inventories and their five-year average.
However, US crude oil production could rise in the rest of 2019. Based on the EIA’s Short-Term Energy Outlook, US crude oil production will average 12.4 MMbpd (million barrels per day) in 2019. So far, US crude oil weekly production averaged approximately 12 MMbpd this year. Last week, the US crude oil rig count was at 776—the lowest level since the week ending February 2, 2018. The oil rig count might bottom out in August.
The oil rig count might impact energy stocks like Chesapeake Energy (CHK). The company has a higher association with oil prices among natural gas–weighted stocks. Chesapeake Energy’s management plans to boost oil production this year, which might have enhanced the relationship. Oil-weighted stocks like Oasis Petroleum (OAS), Denbury Resources (DNR), and others with a relatively higher production mix in commodities linked to oil prices might be on the radar. Oasis Petroleum and Denbury Resources operate with a production mix of 72% and 96.9% in commodities linked to oil prices. For the S&P 500 Index (SPY), any downside in oil could be a concern. Energy stocks account for about 5% of the S&P 500 Index.
In the next 24 trading sessions or until the end of August, US crude oil prices will likely close at $51.93–$60.47 per barrel. The probability for this price range is about 68% based on the implied volatility of 29.6%. With the absence of any solid drivers for oil, the prices will likely trend near the lower limit of our price forecast.