Business: Crude Oil; What Can Investors Expect in 2Q17?

Crude Oil Prices; Biggest Weekly Gain in 4 Months

Crude oil prices 
WTI (West Texas Intermediate) crude oil (USL) (IYE) (BNO) futures contracts for May delivery rose 0.5% and closed at $50.6 per barrel on March 31, 2017. It had the biggest weekly gain in the last four months. Broader markets like the S&P 500 (SPY) (SPX-INDEX) and the Dow Jones Industrial Average fell 0.2% and 0.3%, respectively, on March 31, 2017.

Price are up ~6% in the past week. They’re trading near a one-month high due to:

possible extension of major producers’ production cut deal in 2H17
larger-than-expected fall in gasoline and distillate inventories—suggests improving demand due to the beginning of the summer driving season
supply outage in Libya
Crude Oil Prices: Biggest Weekly Gain in 4 Months


Major oil producers’ meeting 
Higher compliance among OPEC (Organization of the Petroleum Exporting Countries) producers with major producers’ production cut deal in March 2017 supported oil prices. A Reuters survey showed 95% and 94% compliance in March 2017 and February 2017 with targeted production cuts.

On April 2, 2017, OPEC’s secretary general said that global crude oil inventories are falling. It shows that major producers’ production cut deal is helping the oil market rebalance.

Six OPEC members and Oman expressed interest in extending major producers’ production cut deal in 2H17. The deal is expected to remove surplus oil from the oil market. OPEC’s meeting is scheduled on May 25, 2017. Saudi Arabia, OPEC’s largest producer, said it would extend the deal if global crude oil inventories stayed above the five-year average.

Russia is the largest oil producer in the world. Higher compliance by Russia in the coming months with major producers’ production cut deal could support oil prices. Moves in crude oil prices impact oil and gas exploration and production companies’ earnings such as Chevron (CVX), Stone Energy (SGY), W&T Offshore (WTI), ExxonMobil (XOM), and Denbury Resources (DNR).

What’s in this series?
In this series, we’ll look at the energy calendar, US crude oil’s (USO) (XOP) (UCO) highs and lows in the last 12 months, Cushing crude oil inventories, the US crude oil rig count, and some crude oil price forecasts.

Let’s look at the US dollar and how it impacts crude oil prices in the next part of this series.

Crude Oil: What Can Investors Expect in 2Q17? PART 2 OF 7
US Dollar Could Impact Crude Oil Prices in 2Q17
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
Crude oil prices
WTI (West Texas Intermediate) crude oil (SCO) (PXI) (IEZ) futures contracts for May delivery fell 0.1% and were trading at $50.5 per barrel in electronic trade at 4:45 AM EST on April 3, 2017.

Crude oil prices are trading near a one-month high. Broader markets such as the S&P 500 (SPY) (SPX-INDEX), Dow Jones, and NASDAQ Composite Index are near all-time highs. Bullish momentum in the US stock market could support oil demand and oil prices. For more on crude oil prices, read Part 1 and Part 4 of this series.

US Dollar Could Impact Crude Oil Prices in 2Q17


US Dollar Index, the Fed, and President Trump
The US Dollar Index rose 1.3% to 100.2 on March 31, 2017, compared to previous week. The dollar hit a high of 103.8 on January 3, 2017—the highest level in 14 years. The dollar (UUP) rose due to the following factors:

the Fed’s interest rate hike by 25 basis points on March 15, 2017, to 0.75%–1%
improving US jobs market
expectations of fiscal stimulus and possible tax reforms under President Trump
expectations of rising US inflation
the Fed’s interest rate hike by 25 basis points on December 14, 2016, to 0.50%–0.75%
US dollar’s performance
The US dollar fell 1.8% in 1Q17. It fell ~0.9% in March 2017 as President Trump failed to push the healthcare reform bill.

US dollar and crude oil
The US dollar and crude oil (XLE) (XOP) are usually inversely related. A fall in the US dollar makes crude oil more economical for oil importers. When the dollar falls, crude oil prices rise.

Volatility in crude oil prices impacts oil and gas producers’ earnings such as ConocoPhillips (COP), Noble Energy (NBL), Warren Resources (WRES), and QEP Resources (QEP).

Goldman Sachs (GS) predicts an interest rate hike in June 2017 and September 2017. The expectation of multiple interest rate hikes in 2017 could push the dollar higher. The strong US dollar is expected to be one of the key downside catalysts for crude oil prices in 2Q17 and 2017.

In the next part, we’ll discuss the energy calendar for this week.

Crude Oil: What Can Investors Expect in 2Q17? PART 3 OF 7
Energy Calendar: Analyzing Key Oil and Gas Drivers
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
Important events on the energy calendar
The energy sector contributed to ~6.6% of the S&P 500 (SPY) (SPX-INDEX) on March 31, 2017. Oil and gas producers’ earnings such as ExxonMobil (XOM), Continental Resources (CLR), Matador Resources (MTDR), and SM Energy (SM) depend on crude oil (BNO) (DIG) (XES) and natural gas (UNG) (UGAZ) (DGAZ) prices. For the latest updates on crude oil prices, read Part 1 and Part 4 of this series.

Energy Calendar: Analyzing Key Oil and Gas Drivers


Crude oil and natural gas prices are driven by catalysts such as inventories and supply and demand data. Let’s take a look at some important events for the energy sector this week.

Tuesday, April 4:

The API (American Petroleum Institute) will release its crude oil inventory.
Wednesday, April 5:

The EIA (U.S. Energy Information Administration) will release its Weekly Petroleum Status report—read US Crude Oil Inventories Hit a New Record: What’s Next? for more information on the latest report. For more on the crude oil market’s outlook in 2017, read What Can Investors Expect in the Crude Oil Market in 2017? and Decoding the World Oil Supply and Demand Gap in 2017.
The EIA will release its This Week in Petroleum report.
Thursday, April 6:

The EIA will release its Weekly Natural Gas Storage report—read US Natural Gas Inventories Are 14% above Their 5-Year Average for information on the latest report. Read What Can Investors Expect from the Natural Gas Market in 2017? for more on the natural gas market’s outlook in 2017.
The EIA will provide its weekly natural gas update.
Friday, April 7:

Baker Hughes will release the US crude oil rig count.
Baker Hughes will release the US natural gas rig count.
In the next part, we’ll take a look at the crude oil market’s highs and lows in the last 15 months.


Crude Oil: What Can Investors Expect in 2Q17? PART 4 OF 7
Crude Oil Was the Worst Performer in 1Q17
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
Crude oil prices and US stock exchanges
WTI (West Texas Intermediate) crude oil (RYE) (IYE) (SCO) futures for May delivery are near a one-month high as of April 3, 2017. So far, crude oil prices and broader markets such as the S&P 500 (SPY) (SPX-INDEX) are diverging in 2017. SPY has risen 5.3 YTD (year-to-date). However, crude oil prices have fallen ~10% YTD. Meanwhile, US crude oil prices have risen ~21.3% in the last 12 months. SPY rose ~14% during the same period. So, bullish momentum in the US stock market could partially support oil prices. For more on crude oil prices, read Part 1 of this series.

Crude Oil Was the Worst Performer in 1Q17


Crude oil price performance in 1Q17
US WTI crude oil prices fell 6.3% in March 2017 and 5.8% in 1Q17. Likewise, Brent crude oil prices fell 5% in March 2017 and 7% in 1Q17. Brent crude oil was the worst performer across asset classes in 1Q17. In the last quarter, US and Brent crude oil prices had the worst quarterly loss since late 2015.

Crude oil’s highs in the last 15 months
US WTI crude oil prices settled at $54.45 per barrel on February 23, 2017—the highest level since June 2015. As of March 31, 2017, crude oil prices were 7.1% below their high.

Key bullish drivers for crude oil in 2017
possible extension of major oil producers’ production cut deal
rise in US gasoline demand
rise in India’s and China’s crude oil imports and demand
Crude oil’s lows in the last 15 months
US crude oil settled at $26.21 per barrel on February 11, 2016. Crude oil prices hit a 13-year low due to the following factors:

record US crude oil production in 2015
record OPEC crude oil production
record Russian oil production
record global crude oil and high refined product inventories
As of March 31, 2017, crude oil prices have risen 93.1% from their 2016 lows. Higher crude oil (FXN) (FENY) (USL) prices have a positive impact on oil producers’ earnings such as Occidental Petroleum (OXY), Synergy Resources (SYRG), and Goodrich Petroleum (GDP).

Key bearish drivers for crude oil in 2017
rise in US crude oil rigs to an 18-month high
record US crude oil inventories
rise in US crude oil production
near-record OECD crude oil inventories
expectation of a rise in crude oil production from Iran
Crude oil price forecasts
Crude oil prices could crash due to the factors mentioned above. However, crude oil prices are trading above their 200-day moving averages. BTU Analytics thinks that if OPEC doesn’t extend major oil producers’ production cut deal, we could see oil prices breaking below $40 per barrel in the short term. For more on crude oil price forecasts, read the last part of the series.

In the next part of the series, we’ll look at how Cushing crude oil inventories impact crude oil prices.

Crude Oil: What Can Investors Expect in 2Q17? PART 5 OF 7
High Cushing Crude Oil Inventories: Bearish Driver for Crude Oil
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
Cushing crude oil inventories
Market surveys estimate that Cushing crude oil inventories rose from March 24–31, 2017. A rise in crude oil inventories at Cushing could pressure US crude oil (USO) (USL) (BNO) (RYE) prices.

Lower crude oil prices will have a negative impact on crude oil producers’ earnings such as Carrizo Oil & Gas (CRZO), Whiting Petroleum (WLL), Marathon Oil (MRO), and PDC Energy (PDCE).

High Cushing Crude Oil Inventories: Bearish Driver for Crude Oil


EIA’s crude oil inventory report
On April 5, 2017, at 10:30 AM EST, the EIA (U.S. Energy Information Administration) will release its crude oil inventory report for the week ending March 31, 2017.

For the week ending March 24, 2017, the EIA reported that Cushing crude oil inventories fell by 0.2 MMbbls (million barrels) to 67.7 MMbbls—compared to the previous week. Inventories fell 0.3% week-over-week, but rose 2.7% year-over-year.

Cushing crude oil inventories hit 68.3 MMbbls, the highest point ever, in the week ending on May 13, 2016. New pipelines that came online in 2014 and 2015 led to the rise in Cushing crude oil inventories.

Cushing’s storage capacity 
Cushing, Oklahoma, is the delivery point for crude oil futures contracts trading on NYMEX. It’s also the largest crude oil storage hub in the US. Cushing’s crude oil storage capacity is 73 MMbbls.

Impact  
As you can see in the above graph, crude oil (XES) (VDE) (IEZ) prices and inventories have an inverse relationship. Cushing crude oil inventories have risen by ~9 MMbbls, or ~15%, in the last 18 weeks—0.6% below their all-time highs. Near-record Cushing crude oil inventories could pressure crude oil prices to fresh lows.

Crude Oil: What Can Investors Expect in 2Q17? PART 6 OF 7
US Crude Oil Rig Count: Will It Pressure Crude Oil Prices?
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
US crude oil rig count
Baker Hughes (BHI) reported that the US crude oil rig count rose by ten to 662 rigs from March 24–31, 2017. The US crude oil rig count has risen 36 times in the last 39 weeks. US crude oil rigs are at the highest level since September 4, 2015.

The US crude oil rig count has risen 1.4% week-over-week and 82.9% YoY (year-over-year). Crude oil rigs rose as crude oil (DIG) (RYE) (FXN) prices recovered from lows in early 2016. The rise in the crude oil rig count could increase US crude oil output and pressure crude oil prices in 2Q17 and 2017. For more on crude oil prices, read Part 1 and Part 4 of this series.

US Crude Oil Rig Count: Will It Pressure Crude Oil Prices?


Successful implementation of President Trump’s energy policies could also increase US drilling activity. It would be reflected in a higher number of active rigs.

Moves in crude oil (XES) (SCO) (VDE) and natural gas (BOIL) (UGAZ) (UNG) prices impact oil producers and drillers. A rise in US drilling activity would increase the US crude oil output. In the short term, it would have a positive impact on companies’ earnings such as Schlumberger (SLB), Atwood Oceanics (ATW), Diamond Offshore (DO), Chesapeake Energy (CHK), Rowan Companies (RDC), Halliburton (HAL), and Hess (HES).

Peaks and lows
The US crude oil rig count peaked at 1,609 in October 2014. In contrast, it hit 316 in the week ending on May 27, 2016—its lowest level since the 1940s.

US drilling activity fell due to lower crude oil prices, which were the result of oversupply. The US crude oil rig count has risen ~109.5% from its lows in May 2016. As of March 31, 2017, crude oil prices have risen ~93% from their 2016 lows.

Crude Oil: What Can Investors Expect in 2Q17? PART 7 OF 7
What to Expect from Crude Oil Prices in 2Q17
By Gordon Kristopher  | Apr 3, 2017 7:38 am EDT
Crude oil prices
US crude oil (XLE) (USO) (UCO) (RYE) prices fell ~6% in March 2017. For more, read Key for Investors: Buying or Shorting Crude Oil Futures. Lower crude oil prices have a negative impact on oil and gas producers’ earnings such as Noble Energy (NBL), Northern Oil & Gas (NOG), Triangle Petroleum (TPLM), and Cobalt International Energy (CIE). For more on prices and bearish drivers, read Part 4 of this series.

What to Expect from Crude Oil Prices in 2Q17

  market survey of 32 banks shows that Brent crude oil prices could average $56 per barrel in 1Q17.

The EIA (U.S. Energy Information Administration) estimates that US WTI and Brent crude oil prices will average $53 per barrel and $54 per barrel, respectively, in 2Q17. US WTI and Brent crude oil prices averaged $52 per barrel and $53.7 per barrel, respectively, in 2Q17.

The EIA estimates that US WTI and Brent crude oil prices will average $53.5 per barrel and $54.6 per barrel, respectively, in 2017. It also estimates that US WTI and Brent crude oil prices will average $56.2 per barrel and $57.2 per barrel, respectively, in 2018. US WTI and Brent crude oil prices averaged $43.3 per barrel and $43.7 per barrel in 2016, respectively.

Russia’s central bank expects that Brent crude oil prices could fall as low as $40 per barrel by the end of 2017 if OPEC doesn’t extend major producers’ production cut deal in 2H17. REYL Bank expects that crude oil prices could trade between $50 and $60 per barrel in 2017.

Read What Can Investors Expect in the Crude Oil Market in 2017 and Crude Oil Prices: Is the Recovery Sustainable? for more on crude oil prices.

Read Will Crude Oil Prices Test 3 Digits Again? for more information on crude oil price forecasts.

For energy-related analysis, visit Market Realist’s Energy and Power page.