Record Inventory and Slowing US Production Swing Crude Oil Prices
Crude oil prices fall for the second 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.
October WTI (West Texas Intermediate) crude oil futures contracts trading in NYMEX fell by 4.73% and settled at $44.68 per barrel on September 18, 2015. Prices fell due to negative sentiments of oversupply ahead of October crude oil futures contracts expiring. The US benchmark following ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) also followed the price path of crude oil prices in Friday’s trade. These ETFs fell by 4% and 8%, respectively, on September 18, 2015.
Expiry
Crude oil futures contracts for October delivery will expire on September 22, 2015. The crude oil market saw a sell-off due to the squaring off positions ahead of expiry. It was also fueled by pessimistic sentiments due to the Fed not changing the interest rate on September 17, 2015. The delay in the rate hike suggests a possible dent in the US economy. So, it might have led to a sell-off in the US equities because it was reflected in the crude oil market as well. The US is the one of the largest crude oil consumers.
Record inventory
The record inventory from Saudi Arabia to the US is adding pressure to the crude oil market. The latest data from the JODI (Joint Organizations Data Initiative) highlighted that Saudi Arabian inventories hit record levels in July 2015 to 320 MMbbls (million barrels). The slowing export and rising production has led to a rise in inventory. Likewise, the US crude oil stocks were at 455.9 MMbbls for the week ending September 11, 2015. The EIA (U.S. Energy Information Administration) estimates that the global inventory was at 2.9 MMbpd (million barrels per day) in 2Q15 compared to 1.9 MMbpd in 1Q15.
OPEC production
The speculation of record production from OPEC (Organizational of the Petroleum Exporting Countries), despite lower crude oil prices and weak demand cues, will continue to put pressure on crude oil prices. However, the JODI reported that Saudi Arabia’s crude oil production fell to 10.36 MMbpd in July 2015. Saudi Arabia produced 10.56 MMbpd in June 2015. This beat its old record from 1980.
Hedge funds
Hedge funds increased their bullish positions for the fourth consecutive week. However, oil producers or commercial traders continued to increase their short position. This mixed signal shows that there’s still uncertainty in the oil market. The volatility in the oil market impacts oil producers like Apache (APA), Marathon Petroleum (MRO), and Hess (HES). These companies account for 13.40% of the Select Sector SPDR Fund ETF (XLE).
Oil company’s cash flows are hit
The long-term lower crude oil prices also impact major oil companies’ cash flows. Moody’s estimates that in 2015, the major oil companies’ cash flows might fall by 20%. It will result in negative free cash flow of almost $80 billion in 2015. As a result, we could see oil companies announcing more jobs layoffs, reducing capital spending, and curbing investments on future oil projects.
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