Why Did the Crude Oil Market Rise despite Bearish Fundamentals?
Crude oil prices rally for the third straight session
April WTI (West Texas Intermediate) crude oil futures contracts rose slightly by 0.8% to $34.7 per barrel on March 2, 2016. Brent crude oil prices also rose slightly by 0.3% and settled at $36.9 per barrel on the same day. Oil prices rose for the third day due to short covering despite the rise in US crude oil stocks. Oil tracking ETFs like the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) also rose by 1.6% and 2%, respectively, on March 2. The SPDR S&P 500 ETF (SPY) also rose by 0.4% to $199.03.
Short covering and bargain buying
First, the better-than-expected US manufacturing data supported crude oil prices. Second, China’s central bank reduced the reserve requirement ratio for the Chinese banks for the fifth time in a year on February 29, 2016. It also supported the oil market. Third, slowing US crude oil production also supported crude oil prices. Read more about US crude oil production in the seventh part of the series. Short covering and bargain buying also led to the rise in crude oil prices.
Crude oil prices rose more than 31% since the low on February 11, 2016. The recent surge in crude prices supports oil and gas producers like Marathon Oil (MRO), Murphy Oil (MUR), Hess (HES), Noble Energy (NBL), and Whiting Petroleum (WLL). In contrast, higher oil prices increase the input costs to oil refiners like Valero Energy (VLO), Western Refining (WNR), and Northern Tier Energy (NTI).
Meanwhile, the crude oil production deal between Russia, Saudi Arabia, Venezuela, and Qatar on February 16, 2016, to freeze the crude oil production at the January 2016 levels is also driving oil prices higher. To learn more about the historic deal, read Why Crude Oil Prices Fell despite the OPEC and Non-OPEC Deal. Also, read Did Saudi Arabia Keep Its Word and Freeze Crude Oil Production? and Why OPEC’s Crude Oil Production Fell in February 2016.
The possible meeting in mid-March 2016 with Russia, Saudi Arabia, and Qatar to stabilize the oil market will continue to marginally support oil prices in the short term. However, the US crude oil inventory rose to record levels. We’ll discuss how it could impact crude oil prices in the next part of the series.
The roller coaster ride in the oil and gas market also impacts ETFs like the iShares Global Energy ETF (IXC), the SPDR S&P Oil & Gas Equipment & Services ETF (XES), and the First Trust Energy AlphaDEX Fund (FXN).
This series investigates how crude oil, gasoline and distillate inventory, and production impact the oil market. It also covers US crude oil imports, refinery demand, and the crude oil price forecast.