Bear Market: Crude Oil Prices’ Collateral Damage Continues
Will the 1986 Crude Oil Price Collapse Repeat or Could It Be Worse?
Crude oil prices fall for the fourth day
This series analyzes crude oil prices and fundamentals. For an in-depth fundamental look at oil and gas and related companies, sectors, and drivers, please refer to our Energy and Power page.
NYMEX-traded WTI (West Texas Intermediate) crude oil futures contracts for September delivery fell by 1.56% and settled at $47.85 per barrel on Monday, July 27, 2015. Prices fell for the fourth day in a row. They were trading close to the March 2015 levels. Oil prices fell due to mounting concerns of ample supplies in the near and long term. WTI following ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) also followed the price trajectory of US crude oil prices in yesterday’s trade. These ETFs fell by 2.37% and 4.73%, respectively, on July 27, 2015.
What’s dragging prices lower?
The consensus of massive supplies from Saudi Arabia, Iraq, Iran, Russia, and the US is dragging crude oil prices lower. WTI fell more than 23% from the peak in May 2015. The rising global inventories and the US stockpile are also fueling negative sentiments in the crude oil market.
Crude oil prices have lost more than 55% since the mid-week of June 2014. The crude oil glut was the key catalyst for the mammoth fall in oil prices. The massive fall in crude oil prices impacts oil producers like ExxonMobil (XOM), Anadarko Petroleum (APC), and Devon Energy (DVN). Combined, they account for 20.65% of the Energy Select Sector SPDR ETF (XLE).
Many oil producers have been hedging in order to offset lower crude oil prices. However, hedging for 2016 isn’t a solution for many oil producers unless crude oil prices rise. Despite the fall in crude oil prices, oil producers have been able to prevent the many adverse effects of lower oil prices. This is mainly because investors are anticipating a reversal in crude oil prices, according to the forecast from many banks in 2H15. In 1H15, 57 oil companies issued $21 billion in new equity and 58 energy companies issued $73 billion in new debt, according to estimates from Moody’s.
The consensus of the appreciating dollar and the speculation of the Chinese and European economic slowdown will add more pressure to crude oil prices. Also, the Iran nuclear accord might flood the oil market with excess oil if the oil sanctions are lifted.
On the positive side, lower crude oil prices could support crude oil demand. This means cheaper manufacturing, cheaper shipping, and more summer travel. Likewise, slowing production from Libya due to security concerns could support crude oil prices.
On July 27, 2015, the Bloomberg Commodity Index fell for the fourth consecutive day and it hit a 13-year low. US crude oil prices fell for the sixth time in the last ten trading sessions. WTI was the worst performer with respect to other commodities in yesterday’s trade. Oil prices fell more than 8% YTD (year-to-date)—led by oversupply concerns and rising US oil stocks.
Browse this series on Market Realist:
