The Stock Market Weighs on Crude Oil and Opens A Floodgate

• The stock market hits a speed bump
• Crude oil follows the equity markets- The same fundamentals at play in oil and stocks
• Inventories in the US remain a bright spot for crude oil

Commodities tend to take the stairs to the upside and an elevator lower during market corrections. In early 2020, the tensions between the US and Iran in Iraq pushed the WTI and Brent crude oil futures prices to respective highs at $65.65 and $71.99 per barrel. In late April, the rise amounted to a one-day price spike, which was far from dramatic.

The global pandemic had the opposite impact on the downside. By late April, the price of nearby NYMEX futures fell like a falling knife, reaching a low of negative $40.32 per barrel as the May futures contract was expiring. Nearby Brent futures declined to the lowest price of this century when they reached $16 per barrel.

The recovery that followed was another journey to the upside on a staircase. While the two benchmark futures prices reached over $40 per barrel, the ascent was slow and steady. Once they reached the $40 level, they spent months consolidating.

On Tuesday, September 8, the crude oil market got back on the bearish elevator. The four-month recovery came to a swift conclusion as WTI and Brent futures both fell further away from $40. Time will tell if another period of carnage is on the horizon for the energy commodity. The United States Oil Fund (USO) follows the WTI futures price on NYMEX, while the United States Brent Oil Fund (BNO) tracks Brent futures on the Intercontinental Exchange.

The stock market hits a speed bump

Gravity hit the stock market since late last week. Many of the high-flying tech stocks corrected lower. In August, we witnessed as stock splits at Apple (AAPL) and Tesla (TSLA) fueled irrational exuberance in the stock market. Over the recent sessions, stocks slumped from record levels.

Source: CQG

The E-Mini S&P 500 futures contract chart highlights the recent decline from the new all-time peak in the stock market. Stocks had hit lows in March during the risk-off period as the coronavirus spread worldwide, and the V-shaped recovery that took them to new highs ran out of some steam.

Crude oil follows the equity markets- The same fundamentals at play in oil and stocks

While stocks hit lows in late March, crude oil found its bottom on April 20 when NYMEX WTI futures reached negative territory for the first time, and Brent crude oil fell to over a twenty-year low.

Source: CQG

The chart of nearby October NYMEX crude oil futures illustrates that the steep contango or forward premium took the active month futures to a low of $23.26 on April 22. The price rose to a high of $43.78 on August 26, but the energy commodity fell below $40 at the end of last week as the stock market faltered.

On September 8, October futures fell to a low of $36.13 per barrel, the lowest level since June 15. The crude oil futures market has been moving in lockstep with the stock market. Open interest moved higher with the price decline, price momentum and relative strength fell to oversold readings, and daily volatility moved to its highest level since June.

The coronavirus continues to weigh on the US and global economies. At the same time, the upcoming US election that is a referendum on the future of US energy and tax policy, among many other issues, is causing rising uncertainty in markets across all asset classes. Time will tell if the most recent corrections in oil and stocks are speedbumps or the start of another risk-off period like we witnessed earlier in 2020.

Inventories in the US remain a bright spot for crude oil

Over the past weeks, falling production in the US and declining inventories have supported the crude oil price. OPEC, Russia, and other world producers did not taper their production cuts from the 7.7 million barrel per day level at their most recent monthly virtual conference. In the US, daily output fell from a record 13.1 mbpd in March to 10.0 mbpd as of the week ending on September 4. The production rose from the previous week, which was at a low level because of Hurricane Laura’s impact on the US states along the Gulf of Mexico. However, crude oil inventories fell for six consecutive weeks from the weeks ending on June 24 through August 28. Both the American Petroleum Institute and Energy Information Administration reported declines in crude oil stockpiles with product stocks moving mostly lower over the period. For the week ending on September 4, the streak ended as both reported that stockpiles moved higher.

According to Baker Hughes, the number of oil rigs in operation in the US was at 180 for the week ending on September 11, 553 lower than the number in early September 2019. The decline in rigs and falling inventories are not bearish for the price of crude oil. Simultaneously, the weak US dollar is a supportive factor for the energy commodity.

Bullish and bearish factors are pulling the price of crude oil in opposite directions. However, the stock market decline was enough to send the energy commodity to its lowest price level in almost three months. Nearby October futures settled at $37.33 level on September 11 and could be waiting for directional clues from the stock market. Meanwhile, the US election is, among many other things, a referendum on the future of energy policy in the world’s leading oil producer. We could see lots of volatility over the coming weeks as the election approaches.

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The U.S. Oil Fund LP (USO) fell $0.30 (-1.11%) in premarket trading Monday. Year-to-date, USO has declined -73.92%, versus a 5.96% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #65 of 112 ETFs in the Commodity ETFs category.