Crude Oil Prices Set to Break Win Streak as E&P CapEx Rises
Aug 15, 2023
WTI crude oil futures (/CL) are trading about $1.10 or 1.33% lower on Tuesday morning as the commodity struggles after a seven-week win streak. Last week, prices hit the highest level since November 2022, with the U.S. benchmark briefly trading as high as $84.89 per barrel.
Oil bulls have had plenty to cheer about recently, from Saudi-led OPEC production cuts to resilient consumer demand to China stockpiling crude. But after the recent rally of about 20% over nearly two months, it’s a reasonable time to take profits for traders.
That said, the outlook remains supportive for crude prices for several reasons: OPEC is expected to keep its production capped, China is refining crude at a record pace, OECD stocks are well below the five-year average, summer air travel is strong and the U.S. consumer remains resilient.
After two years of subdued spending by oil exploration and production (E&P) companies, capital expenditures—the money spent to purchase, maintain or improve assets—is on the rise. Last week, the U.S. Energy Information Administration (EIA), citing data from Evaluate Energy, said capital spending rose in the first quarter of this year from the prior quarter.
The EIA cited a $1.8 billion, or 12%, increase in capital expenditures over the time frame, although cash from operations fell. That data captures financial results from 40 publicly traded U.S. E&P firms. When oil prices rise, these firms usually increase their capex spending to produce more oil.
Oil production often lags capital expenditure spending by three to four months, which aligns with what we are currently seeing in U.S. production figures. The EIA reported last week that domestic production rose to 12.6 million barrels per day (bpd), a 400,000 bpd increase from the week prior.
If this trend continues, it should bode well for E&P profits. However, even if U.S. production continues to rise, prospects for high demand through the end of the year, along with OPEC cuts, should support prices through the second half of this year. In fact, OPEC stated last week that global demand should rise 2.44 million barrels per day (m/bpd) this year to total 102.01 m/bpd, and 104.25 m/bpd by next year. That would be 4 m/bpd above the pre-pandemic high.
Despite today’s pullback, prices remain well positioned technically. A recent crossover between the 50-day simple moving average (SMA) and the 100-day SMA, supports a bullish outlook, suggesting healthy price momentum. However, prices stalled as the relative strength index (RSI) neared the 70 overbought level. Ideally,
we would like to see prices extend higher alongside the RSI crossing above the 70 level. This behavior suggests traders are taking the opportunity to exit their positions here. Once this round of sellers shakes out, which could require a deeper pullback, a resumption higher should continue.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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