Where Is US Crude Oil Headed? An Energy Update

On August 30, US crude oil October futures settled at $55.1 per barrel. On a week-over-week basis, US crude oil prices rose 1.7%. The United States Oil Fund LP (USO), which tracks crude oil futures, rose 2.4%. The surprise fall in US crude oil inventories pushed prices up. The S&P 500 Index (SPY) also rose 2.8%.

Bullishness in SPY helped oil prices sustain their gains. The rise in oil prices helped the Energy Select Sector SPDR ETF (XLE) gain 2.7% in the same period. Among sector-specific SPDR ETFs, XLE was the sixth-largest gainer last week.

Based on a Reuters survey released on August 30, OPEC’s total output in August rose by 80,000 barrels per day more than July. In July, OPEC’s output fell to its lowest level in almost five years. Rises in oil production from Nigeria and Iraq pushed total output higher. The rise in the output was modest, but it was sufficient to pull oil prices down under the current circumstances. OPEC will release its Monthly Oil Market Report for last month on September 11.

Moreover, according to the Russian Ministry of Energy data on September 2, in August Russia’s oil output rose by 0.14 MMbpd (million barrels per day) on a month-over-month basis. The rise is likely to cause a downside in oil prices this week.

In the US, oil production fell for the second consecutive month. Based on the EIA’s (U.S. Energy Information Administration) Monthly Crude Oil Production Report on August 30, in June, oil production fell 33,000 barrels per day from the previous month. The lower oil rig count could be behind it.

In the week that ended on August 30, the US oil rig count was at 742, its lowest level since January 2018. However, based on the relationship between the oil rig count and oil prices, the oil rig count could rise this month, which could push US oil production higher in the coming days.

On August 30, US crude oil futures’ implied volatility was at 29.7%. Based on this implied volatility, US crude oil futures are expected to close between $53.18 and $57.08 per barrel in this week. The model assumes prices are normally distributed. The probability of futures’ landing in this price range is 68%. The EIA inventory data will play an important role in oil’s price movements this week.

A fall in the EIA’s inventory data could limit any possible downside in oil prices. On September 5, the EIA will release its inventory data for the week that ended on August 30. A day earlier, the API will release its oil inventory data. On September 6, the US Bureau of Labor Statistics will release the US unemployment rate for August. If the US unemployment rate stays near 3.7% like in July, the US dollar could become stronger than other currencies—a negative development for oil prices.

Apart from these key events, Hurricane Dorian will also affect oil markets this week. Hurricane Dorian could hit Florida. After Hurricane Irma in 2017, gasoline prices rose significantly in the region. Maritime transportation is a major source of Florida oil demand. Given the absence of an interstate pipeline, oil demand could take a hit.

Last week, natural gas active futures rose 6%, the second-highest weekly gain in 2019. The United States Natural Gas Fund LP (UNG) rose 5.7% last week. UNG tracks natural gas futures. In the week that ended on January 18, natural gas active futures saw their highest weekly gain, rising 12.4%. Despite bearish inventory data on August 29, the forecast for higher cooling degree days could be behind the upside in prices.

Natural gas–weighted stocks such as EQT Corporation (EQT) and Cabot Oil and Gas (COG) have returned -1.7% and 1.7%, respectively. These two stocks operate with production mixes of 95% and 100%, respectively, in natural gas. In fact, on average, natural gas–weighted stocks fell 3.5%. Because of inventory data, investors might be skeptical about these energy stocks’ rises.

Last week, the VanEck Vectors Oil Services ETF (OIH) rose 4.7%, the highest among major energy subsector ETFs. The VanEck Vectors Oil Refiners ETF (CRAK) rose 2%, the least among its peers. A weaker Brent-WTI spread last month could have affected CRAK’s performance compared to other major energy subsector ETFs. US refiners make up 31.6% of this ETF.

The remaining major energy subsector ETFs, such as the Alerian MLP ETF (AMLP) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP), rose 2.9% and 3.1%, respectively, in the week that ended on August 30. The rise in oil and natural gas prices might have helped these energy subsector ETFs to rise.