Oil Trade: Why Crude Oil Prices Are In Steep Retreat (USO, UCO, SCO, XLE)
Ben Gersten: Oil prices sank to their lowest level in eight months Wednesday and the trend continues. Crude oil for August delivery fell yesterday (Thursday) below the $80 line to $78.20 a barrel on the New York Mercantile Exchange.
Oil prices breaking the $80 line can have a psychological impact on traders, which could send oil spiraling even further.
“Oil is participating in the broad decline of equities and commodities,” Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago, told Bloomberg News. “We broke an extremely key level for oil, the previous monthly low around $81.”
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Oil prices fell more than 3.5% the day after the Fed announced a disappointing extension of Operation Twist.
The commodities market, measured by the S&P GSCI Spot Index, entered into a bear market yesterday, off 22% from its highest close of the year on Feb. 24.
Many experts think oil is reaching a bottom – but there are other factors still in play.
Weak Reports Bring Oil Down
Besides the Fed’s announcement, oil prices were hurt by economic reports domestically and abroad.
Manufacturing has declined in the U.S., Europe and China, initial U.S. unemployment claims were higher than expected, and existing U.S. home sales were lower than expected.
Oil prices are also sliding from the recent surge in oil stockpiles, and due to concerns that demand will slow.
Reports issued Wednesday by the Energy Information Administration (EIA) said oil supplies grew by 2.9 million barrels last week. Analysts had expected a decline of 600,000 barrels.
Oil supplies have risen this year to the highest level since 1990, thanks to thriving oil production in North America.
“The U.S. is flush with oil right now,” independent analyst and trader Stephen Schork told the AP. “And if you factor in the economic mess in Europe, slower economic growth in China, and probably overproduction from the Saudis in preparation for the Iranian oil embargo, the world has a comfortable supply of oil.”
So when will the black gold bounce back?
Dr. Kent Moors on Crude Oil Prices
Money Morning’s energy expert Dr. Kent Moors recently outlined what was going on with oil prices for his Oil & Energy Investor newsletter readers.
He stated that previous high oil price forecasts were dependent on nine different factors leaning a certain way, and currently six of those are still pointing to higher oil prices.
Oil has just been the victim of a bear market, especially in the energy sector.
“There were no fundamental reasons why the slide has lasted as long as it has,” said Moors. “A short-term pullback had been in the cards for early May, but I had that bottoming out at an 8% to 9% correction – nowhere near the upwards to 20% we actually got.”
“Oil itself, however, is still in the grasp of forces that have less to do with the actual dynamics of the oil market and more to do with market emotion (you know, for each dose of “irrational exuberance,” there is an equal measure of “irrational pessimism”),” Moors continued. “So we will see a recovery in our energy stocks first, before we see another rise in oil prices. The combination of severe concerns over the European mess, the flight to the U.S. dollar (that singlehandedly depresses oil prices), the unusual situation in the bond market… They have all contributed to the decline.”
But Moors does expect oil prices to eventually climb citing the fact that international demand is rising toward its highest level in five years.
The Iran embargo set to go in effect July 1 and an eventual strengthening of the euro versus the dollar should eventually bring oil back up.
That rise might just take some time given current economic conditions.
So for now don’t expect to see oil prices at $125 by early July, but enjoy the slightly lower prices at the pumps.
Related Tickers: SPDR Select Sector Fund (NYSEARCA:XLE), ProShares UltraShort DJ-UBS Crude Oil ETF (NYSEARCA:SCO), ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), United States Oil Fund LP (NYSEARCA:USO).
Written By Ben Gersten For Money Morning
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