Crude’s Slippery Slope
Geoffrey A Smith
Oil and gas are two commodities that we use every day. How much we use can fluctuate from week to week, and we can end up spending more one week because the prices have increased. So what causes the price to increase and fall from week to week? Supply and demand for one thing, but there are geopolitical influences as well. Geopolitical events are hard to trade because there is no schedule to them. On the other hand, supply and demand we can trade because we get a report each week on the inventories of these commodities. At 09:30am CT each Wednesday, the EIA (Energy Information Administration) releases a petroleum status report that gives the US inventories on crude oil, unleaded gasoline, kerosene, and propane. They also release a natural gas report each Thursday at 9:30am CT for the natural gas inventories. These reports allow us to see the supply and demand in the US.
Many have been asking why oil prices have declined during a time when they have a tendency to rise. Logic tells us that the summer months are vacation months and there is a higher demand on oil because of gasoline consumption. But the price of gasoline and crude oil have declined since the middle of June during the meat of the summer. This is even contrary to the inventories reported by the EIA in the chart below. Notice that inventories have declined almost every week this year (note: SPR is the Strategic Petroleum Reserve).
At the beginning of this year, the Keystone Pipeline was completed between Cushing, OK, and the Texas Gulf Coast. Cushing was basically an island in the center of the US. There are only 2-lane roads in and out of there, so it took a lot of semi’s to move the oil. Now they can pipe it out. But since we still take inventories at Cushing, we have seen a decline in inventories. What is not shown is the increase at the refineries on the Gulf Coast. Since oil can be shipped out much quicker, it has to be going somewhere, and that is not showing in the inventories.
The second reason oil prices are declining comes from the “world economy”. Europe, Japan, and China are beginning to show some economic weakness. The US is still stagnant, but the first quarter of this year was down (GDP showed a -2.1% contraction). This is the demand side of the equation. Demand has dropped. Supply is healthy. Put the 2 together and you have negative/weak prices. Look at the EIA chart below on US crude oil production. Notice the large increase over the past 2-3 years. According to Reuters, July 2014 had the highest oil production in the US in 27 years.
One last chart. Below is a weekly chart of crude oil. The simple moving averages are a 3 period, 21 period, and 65 period average. Notice that the 3 period average is below both the 21 and 65 week averages. Based off the current chart, crude is weak as long as it stays below the 100.50 per barrel area. There is big support around the 91.25-92.00 area, and if that is broken, 85 dollar crude might be in the books.
High production, missing inventories, and slower world demand adds up to a slippery slope of crude. Good luck trading!