Inventories Push Oil Higher

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July 31, 2019 3:03pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

From Andrew Hecht

  • A huge inventory decline
  • Production is falling
  • Rig counts are below last year’s level- Oil could recover

The price of crude oil was sitting at just above the $56 per barrel level on the nearby September NYMEX futures contract on Friday, July 26. In the past, the situation in the Middle East with Iran and the US facing off would have sent the price of the energy commodity significantly higher. With 20% of the world’s crude oil traveling through the Straits of Hormuz each day, tensions in the region create supply concerns for consumers around the globe. However, the price of crude oil was at around $10 below the April high at the end of last week. 

When it comes to the supply and demand fundamentals for the crude oil market, the recent pressure has come from a profound change in the market’s dynamics. The United States is now the world’s leading producer of oil. Technological advances in extracting the energy commodity from the crust of the earth and favorable tax and regulatory changes under the Trump administration have made the US a lot less dependent on the production from other parts of the world. Today, US daily output is higher than from Saudi Arabia and Russia. 

Meanwhile, the latest data from the US could limit the downside potential for the price of oil. The United States Oil Fund, LP (USO) is the ETF product that tracks the price of NYMEX crude oil futures on a short-term basis. 

A huge inventory decline

Last week, both the American Petroleum Institute and the Energy Information Administration reported significant drops in crude oil inventories. The API told the market that stocks fell by 10.961 million while the EIA reported a decline of 10.8 million barrels for the week ending on June 19. Over the past six consecutive weeks, stockpiles of crude oil have been decreasing. Falling inventories tend to be supportive of the price of the energy commodity. 

Production is falling

At the same time, the EIA said that daily output from the United States fell by 700,000 barrels per day for the week ending on July 19 to 11.3 million. The output recently reached a record high at 12.3 million barrels, and the decline is not bearish for the price of crude oil. Even at the lower level, the United States remains the world’s leading oil producer, with the Saudis and Russians close behind. However, both agreed to extend OPEC production cuts of 1.2 million barrels per day into 2020 at the early July meeting of the cartel. With production edging lower, and supply concerns in the Middle East, the output data is another factor that could support the price at the $56 per barrel level on nearby September NYMEX futures.

Source: CQG

The daily chart shows that at the end of last week, the price momentum indicator declined into oversold territory. Relative strength in the crude oil futures market is nearing the bottom end of a neutral condition. The technical metrics could be pointing to a recovery in the price of crude oil over the coming week. 

Rig counts are below last year’s level- Oil could recover

Finally, last Friday, Baker Hughes reported that the number of oil rigs in operation as of July 26 stood at 776. The rig count fell by three on a week-on-week basis and was 85 lower than last year at this time. Fewer operating rigs translates to lower production. 

The odds currently favor a recovery in the crude oil futures market. Moreover, with Iran and the US at odds in the Middle East, any price spike are likely be on the upside. 

The United States Oil Fund LP (USO) was trading at $12.13 per share on Wednesday afternoon, up $0.05 (+0.41%). Year-to-date, USO has gained 1.00%, versus a 12.57% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 109 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of

About the Author: Andrew Hecht

andrew-hechtAndrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

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