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Are Oil Equities In Trouble?

Accendo Markets
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As the supply of crude oil increased sharply, and with OPEC refusing to cut production in order to maintain market share, a supply glut hit the market and the price of oil tumbled by almost 48%. A survey of 17 analysts predicted that prices will fall as low as $50 in 2015 and that this trend will continue until the global glut ends. All major OPEC producers proved that they are not going to change their decision on reducing their oil production of 30 million barrels a day to stabilise prices again. The UAE energy minister stated that the organisation will not go back on its decision even if prices fell to $40. OPEC will endure this very low price in order to make sure that US production is inefficient thus stabilizing prices without causing their dominant market share to fall. The graph below shows that Brent Crude futures hit an all-time low price of $59.93, falling from $112 in June. Also, all the averages (50,100 and 200-day) are heading into a downward trend with the MACD falling below the signal line, which is a very bearish sign, which indicates that the price might fall further in the future.

Figure 1. One-Year price graph of Brent Crude futures

The S&P 500 Energy index is one that is constituted of all companies in the S&P 500 which operate in the energy sector. The index has also fallen by almost 49% from June 2014 and all moving averages are also heading into a downward trend.

Figure 2. S&P 500 Energy Index

The MACD is similar to that of the Brent crude futures. The 100-day average recently crossed below the 200-day average, a very bearish sign, indicating a long-term downward trend. Whilst oil prices go down, companies that are operating in the energy industry face significant challenges as revenues decrease which therefore requires huge cost cuts to keep operations profitable. Of the major companies that are involved in the manufacture or distribution of crude oil, Devon Energy Corp is an independent company that is involved primarily in exploration, development and transportation of oil, and with such a huge exposure to the commodity it is enduring huge costs from the large fall in prices of Brent Crude caused by the supply glut.

Figure 3. Devon Energy Corp. 1-Year Historical Graph

The graph above shows the correlation between Devon Energy Corp and the S&P Energy sector. Both MACD are below the signal line and the moving averages also indicate the long-term downward trend the industry is facing. If as predicted Brent Crude prices to fall further to $50, and with OPEC refusing to halt its production, Devon Energy Corp will face more difficulties and this might be reflected in their share price, thereby making its future very bearish.

Figure 4. Exxon Mobil Corp. 1-Year Historical Graph

Exxon Mobil Corporation (NYSE:XOM) operates petroleum and petrochemicals businesses on a worldwide basis therefore it is also prone to huge costs as prices fall, as it shows all the bearish signals in the industry.

The outlook of oil prices is that is facing a long-term downward trend until US producers pull out of the market which will help stabilise prices. Prices might continue to fall as this is not likely to happen soon. Expectations also play a huge role in share prices and most analysts expect the price of Brent Crude to continue falling in the near future.

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Ahmad Al Abdali: Introduced to investment at a very young age, he has always been passionate about the online trading industry, he follows it constantly and loves being aware of anything new happening in the macro environment. His area of specialty is technical analysis.

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