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Crude Oil Weekly Update: A Tough Road Ahead

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Aug. 12 2019, Updated 5:21 p.m. ET

Last week, US crude oil active futures fell 2.1%, the fourth consecutive weekly decline. On August 7, after the EIA inventory data release, US crude oil prices fell 4.7%. Plus, the inventories spread rose by 2 percentage points during in the week ended August 2.

Any expansion in the inventories spread is a negative development for oil prices. The inventories spread is the difference between US crude oil inventories and their five-year average.

On August 5, the S&P 500 Index (SPY) declined 3% on trade war concerns. However, US crude oil active futures were down 1.7%. Usually, a drop of such magnitude in the SPY could bring a more substantial fall in oil prices.

On July 31, the EIA reported a contraction of 2 percentage points in the inventories spread. Early in the last week, this contraction limited oil’s downside.

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Signs not good for crude oil

On August 9, President Trump’s trade advisor, Peter Navarro, warned China about the yuan’s fall. Any further escalation in the trade war could bring more downside for oil.

The IEA already warned that oil’s demand growth rise for the first five months of 2019 is the lowest since 2008. During the subprime crisis, US crude oil prices fell as low as $30 per barrel. We expect the August 14 EIA inventory data to be important for oil prices. Moreover, the API inventory data scheduled for August 13 should provide an important hint for oil’s price movement.

Energy stocks and ETFs

Oil’s fall could drag upstream energy stocks like Chesapeake Energy (CHK). Among the natural gas–weighted stocks, Chesapeake Energy had the highest degree of association with oil prices. In the trailing week, CHK’s stock price fell 12.2% and was among the week’s underperformers.

On August 6, CHK reported adjusted earnings per share of -$0.10, compared to analysts’ consensus estimate for a loss of $0.06 per share. On the same day, CHK’s stock price declined around 11%.

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The SPDR S&P Oil & Gas Exploration & Production ETF fell 3.9%, the second-smallest decline among the major energy subsector ETFs. However, the VanEck Vectors Oil Services ETF (OIH) fell 8.2% and underperformed the remaining energy ETFs. The US oil rig count fell to 764, its lowest point since February 2, 2018. The slowdown in US oil drilling activities may have dragged OIH down.

Price forecast

US crude oil active futures could close between $52.48 and $56.52 per barrel until August 16. This forecast is based on oil’s implied volatility of 31.7% and the normal distribution of prices. The probability for this price range is 68%.

In the last trading session, active futures settled 5.1%, 4.7%, 9.8%, and 6.2%, respectively, below the 20-, 50-, 100-, and 200-day moving averages. Technical indicators suggest a bearish trend in oil prices.

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