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Why crude oil prices remain volatile with a downward bias

Kshitija Bhandaru

Inventory data—crude oil is choppy, while natural gas is hopeful (Part 4 of 8)

(Continued from Part 3)

Crude oil prices remain volatile

West Texas Intermediate (or WTI) crude prices fell amid speculation that U.S. oil demand is decreasing given the rise in inventories. As covered in the previous section, crude inventories increased for the first time in seven weeks. Refineries have cut their capacity use as they enter into planned seasonal maintenance.

The decline was short-lived. The U.S. Energy Information Administration (or EIA) reported that petroleum-product stockpiles, especially distillates—including heating oil and diesel fuel—fell more than analysts expected.

Crude prices increased $0.22 to settle at $97.59 a barrel on August 13. Crude prices were $97.37 the previous day.

What’s keeping the bottom from falling out?

Oil output will likely be threatened by the following supply-related factors. Markets are watching the evolution of these “factors” closely.

U.S airstrikes in Iraq

This week the U.S. carried out airstrikes against extremists from the Islamic State of Iraq and Syria (or ISIS) in Iraq. ISIS threatened to invade the crude-rich areas in the Kurdish regions.

According to CNN, the affected area contributes to ~15% of Iraq’s oil production. Iraq is the second largest producer in the Organization of Petroleum Exporting Countries (or OPEC). Supply disruption could drive prices higher.

Russian Crisis

Earlier last week, we saw Russia react to U.S. and European Union’s (or EU) energy sanctions. The sanctions were enacted because Russia has supported insurgents in Ukraine. The sanctions have banned food imports from the West. For more information on the banned food imports, read our Market Realist series Investor must-know: Russia retaliates against Western sanctions.

Further confrontations could be “oil-related.” This would drive oil prices higher. Russia is one of the world’s top producers and exporters of oil and gas.

Israel and Gaza

As negotiations between Israel and Gaza continue, both parties have yet to reach a common ground to end the conflict. The talks center on lifting the Gaza Blockade that Israel imposed eight years ago—the key demand put forward by Gaza.

If a truce doesn’t succeed and the situation worsens, the Gaza Strip might find support from the neighboring oil-producing countries. The other countries could get drawn into the altercation. This could affect oil supplies.

When oil supplies are threatened, oil prices trade higher. This is positive for oil producers like Occidental Petroleum (OXY), Murphy Oil (MUR), and ConocoPhillips (COP). Most of these companies are part of important exchange-traded funds (or ETFs) such as the Energy Select Sector SPDR ETF (XLE) and the iShares U.S. Energy ETF (IYE).

The next part of the series will discuss the WTI-Brent spread.

Continue to Part 5

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