Weekly Edge: Oil Inventories Rise, Prices Fall

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by: Invest With An Edge

By Troy Tanzy

Oil prices fell through Tuesday (10/23) and early Wednesday morning (10/24) amid continued pressure on the commodity. Brent crude, the global benchmark oil price, was trading at just above $76 per barrel, nearing its lowest point since early September.

Brent closed more than 4% below its opening price on Tuesday (10/23), a sharp decline from its high of more than $86 at the beginning of the month, as the commodity shared in declines with global equity markets. The following chart from The Wall Street Journal shows how volatile crude has been. The steep sell-off Tuesday has been attributed to two factors: hedge funds locking in profits and concerns over inventory increases.

Large hedge funds have been closing their positions lately as they observe fundamentals for rising prices beginning to soften. Saudi Arabia, the world's largest exporter of oil, is not expected to cut production following international criticism about its role in the death of journalist Jamal Khashoggi. This means supply increases elsewhere in the world will buoy inventories and could push prices down further. Instead, the kingdom's energy minister announced the country would scale up production (OPEC and Russia also agreed to begin gradually doing so earlier this year).

Concerns that the West may impose sanctions against Saudi Arabia in response to Khashoggi's death appear to be unfounded at this time. Sanctions on Iranian oil levied by the United States, however, are set to take effect next month.

The Energy Information Administration (EIA) just released its weekly inventory report showing crude levels in the U.S. rose by 9.9 million barrels last week, the fifth straight week inventories have risen. In simple supply-and-demand economics, rising supply brings prices down. It is important to note that the WTI crude price is the benchmark for U.S. oil, which is separate from the price of Brent crude (the global benchmark price). Large supply increases in the U.S. could affect WTI prices more than Brent.

We will be closely watching the energy market both domestically and globally as production continues to rise and inventory begins piling up.

Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from -13.91 to -18.73 following a continued volatile environment for equities. Utilities and Consumer Staples rose last week as investors fled to safer, steadier stocks. The biggest detractor was Energy, down 23 points to -32. Utilities remains the top sector, while Materials remains at the bottom.

Factors: Among the Factor Benchmark ETFs, the average factor score decreased from -15.75 to -21.25 as the downward trend continued. Yield was the only factor that rose last week, which helped it retain the top spot. Low Volatility was unchanged, and all of the other factors declined. High Beta was the worst performer last week, losing 15 points and overtaking Small Size as the worst factor.

Global: Global Benchmark ETF momentum decreased this week from -21.36 to -26.91. Latin America, still in the top spot, fell by 12 points, making it the biggest detractor for the week. The biggest gainer was China, which rose 4 points but still remained in the bottom spot. Pacific x-Japan also rose slightly. Every other region fell, as did the World Equity category.