Crude oil futures are contracts that allow traders to buy or sell a specific amount of oil at a predetermined price and date. They are widely used as a way to hedge against price fluctuations and to speculate on future market movements.
In this article, we will look at how crude oil futures extended their downtrend on Monday, May 15, 2023, and what factors influenced their performance. We will also provide some insights into the outlook for crude oil prices and how traders can use futures to take advantage of the market opportunities.
Crude Oil Futures Dropped by 3.9K Contracts on Monday
According to preliminary readings from CME Group, the open interest in crude oil futures, which is the total number of outstanding contracts that have not been settled or closed, dropped by around 3.9K contracts on Monday. This indicates that traders were closing their positions or reducing their exposure to the market.
The decline in open interest was accompanied by an increase in volume, which is the number of contracts traded during a given period. Volume increased by around 4.1K contracts on Monday, after two consecutive daily pullbacks. This suggests that there was more trading activity and liquidity in the market.
The drop in open interest and the rise in volume could be interpreted as a sign of bearish sentiment among traders, who were either taking profits or exiting their long positions (bets that the price will rise) in anticipation of lower prices.
What Factors Influenced Crude Oil Futures on Monday?
One of the main factors that weighed on crude oil futures on Monday was the renewed concerns over the global economic recovery amid the ongoing coronavirus pandemic. The US reported a lower-than-expected retail sales growth for April, while China’s industrial production and retail sales also missed expectations for the same month.
These data points raised doubts about the strength and sustainability of the demand for oil, especially from the two largest consumers of crude oil in the world. The International Energy Agency (IEA) also lowered its forecast for global oil demand growth for 2023, citing the slow pace of vaccination campaigns and the emergence of new virus variants.
Another factor that pressured crude oil futures on Monday was the strength of the US dollar, which tends to have an inverse relationship with oil prices. The US dollar index, which measures the greenback’s value against a basket of six major currencies, rose to its highest level since late April on Monday, boosted by the higher US Treasury yields and the safe-haven demand.
A stronger US dollar makes oil more expensive for foreign buyers, which could reduce their demand and lower oil prices. Conversely, a weaker US dollar makes oil cheaper for foreign buyers, which could increase their demand and boost oil prices.
What is the Outlook for Crude Oil Prices?
Despite the recent weakness in crude oil futures, some analysts and experts remain optimistic about the outlook for oil prices in the medium to long term. They cite several factors that could support the oil market, such as:
– The gradual reopening of economies and easing of lockdown measures as more people get vaccinated and infection rates decline.
– The ongoing production cuts by OPEC+ (the Organization of Petroleum Exporting Countries and its allies), which have helped to balance the supply and demand dynamics and reduce the global oil glut.
– The rising geopolitical tensions in the Middle East, especially between Iran and Israel, which could disrupt oil supplies and create supply shocks.
– The growing demand for cleaner energy sources and lower-carbon fuels, which could increase the demand for light sweet crude oil blends like WTI (West Texas Intermediate), which have lower sulfur content and emit less greenhouse gases than heavier sour crude oil blends.
Based on these factors, some analysts expect crude oil prices to average around $75 per barrel in 2023, while others project them to reach $80 or even $100 per barrel by the end of 2023 or early 2024.
How Can Traders Use Futures to Trade Crude Oil?
Traders who want to trade crude oil can use futures contracts as a way to gain direct exposure to the market and benefit from its price movements. Futures contracts allow traders to buy or sell a specific amount of oil at a predetermined price and date in the future.
Traders can use futures contracts to hedge against price fluctuations and protect their existing positions or assets from adverse market movements. For example, an airline company that uses jet fuel as its main input can buy crude oil futures contracts to lock in a favorable price for its future fuel needs and avoid paying higher prices if oil prices rise.