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Crude Oil Price Forecast: Strong Oil, Weak Earnings

Oil managed to finish the week higher than where it began by $0.50 per barrel, but price momentum is weak. Concern remains in the market about the level of global oil supplies and whether the glut that sent prices plummeting has been fully cleared.

Oil Company Earnings Season in Full Swing

Many oil companies reported second quarter financial results last week. The recovery in oil prices over the previous 12 months is reflected in improved earnings, although Wall Street battered some share prices of companies that failed to meet earnings expectations.

Chevron Corporation (CVX) reported earnings of $3.3 billion in its upstream business segment for the second quarter, a vast improvement over the $853 million earned the year before. Despite the strong upstream performance, earnings for the whole company came in under analyst expectations, and shares were down 2% on the news.

Shares of Exxon Mobil Corporation (XOM) fell 4% in early trading on Friday after the company also undershot analyst expectations. The largest U.S. oil company said that production fell 7% in the second quarter of 2018 compared with a year earlier, even as Permian and Bakken production rose 30%. Exxon continues to invest heavily in its upstream business, increasing capital and exploration expenditures by nearly 75% compared with a year earlier to $4.86 billion.

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More Financial Results This Week

This week will see more financial results from the oil sector. BP p.l.c. (BP) will release its second quarter results on Tuesday. The performance update comes hot on the heels of the company’s $10.5 billion acquisition of BHP Billiton Limited’s (BHP) upstream assets in the U.S. That same day, the market will see second quarter results from Anadarko Petroleum Corporation (APC) and Devon Energy Corporation (DVN). On Wednesday, Apache Corporation (APA) reports second quarter results, and Noble Energy, Inc. (NBL) does so on Friday.

Energy Sector Underperformance

It is not just America’s two largest oil companies that are disappointing energy analysts. Data from FactSet shows that the energy sector is second to last regarding net profit margins when looking at S&P 500 sector-level performance. In the second quarter of 2018, energy sector profit margins are expected to be just 7%. These margins are barely better than their five-year average of 5%. This unfortunate result comes despite a strong rally in oil prices in the past year and the five-year average data containing the oil price crash of 2014. Other heavy industries in the S&P 500 Index like industrials, utilities and materials are all expected to fare better.

S&P 500 sector-level net profit margins

Price Momentum Very Weak

Oil ended Friday on a down note, handing back gains made in the previous two trading sessions and closing below the 21-day exponential moving average. Upward price momentum is challenged as the 55-day exponential moving average enters the early stages of a downturn and the moving average convergence divergence (MACD) momentum indicator remains firmly below the neutral zero line.

Technical indicators for oil are mixed and neutral. For example, on a daily price chart, only one technical indicator is signaling a buy, with seven sells and three neutral. Simple moving averages are slightly more bullish, with five buys and one sell, mixed between the long and short term. Exponential moving averages are decidedly more bearish on the front end with four sells.

Oil’s daily price chart entered another bearish reversal candlestick pattern on Thursday that traders call the Deliberation Bearish Reversal. In this pattern, prices continue to move higher, but every up candle is smaller than the previous one. Even though an uptrend continues, the small third body suggests that the last rally is losing strength and preparing for a reversal. We saw this on Friday, with oil dropping on news of a rising oil drilling rig count.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice. Gary does not own any stocks mentioned in this article. Oil price chart courtesy of StockCharts.com.

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