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Make or Break Time for Gold Bulls

It's been frustrating several months for the gold (GLD) bulls, and the past month hasn't been any easier. This is because we had incessant calls for $2,500/oz and $3,000/oz gold heading into Q4 of last year, and instead, we've seen the rug pulled out from underneath the precious metals. This is why it's always wise to reduce exposure when the chants of 50% higher prices come out and only look to incrementally add back exposure when despondency begins to creep back into the market.

Fortunately, with the yellow metal down 17% from its highs, the chants are now drowned out by predictions of $1,400/oz and many calls that gold is worthless given its poor performance in a backdrop of unprecedented monetary stimulus. This shift in sentiment conveniently is occurring simultaneously, as gold is resting on a key long-term support level, which suggests we're likely nearing a bottom. Let's take a closer look below:

Chart, histogram Description automatically generated

(Source: TradingView.com)

The recent price action in gold is disheartening, to say the least, but it's important to put the current correction in context and show that 17% - 20% corrections are completely normal, even in bull markets. In the chart below, we can see a 50-year history of the gold price, and it's clear that there have been some nasty corrections along the way. However, one indicator has typically helped to define bull and bear markets, and this is the metal's long-term quarterly moving average (grey line).

If the metal is above this indicator, one can be bullish long-term, and if the metal breaks below this indicator and can't reclaim it immediately, one should switch to neutral at a bare minimum or lean bearish. In two of three instances after major yearly breakouts, gold broke out only to re-test this moving average after its initial run higher.

This occurred in the late 1970s and again in 2008, with the corrections from these seemingly failed breakouts being significant. However, after a brief shakeout below this key level, the bulls managed to regain their composure, and we saw violent rallies. It's quite rare that multi-year breakouts fail, but it's not rare that we see significant turbulence after them, so the next few months should be very important to tell us if this was indeed a failed breakout or just a violent shakeout.

Chart, histogram Description automatically generated

(Source: TC2000.com)

If we look at the current chart of gold, we have a very similar look to what we saw in 2008, with the metal breaking out a multi-year base and then correction for over nine months into its breakout level. The metal briefly traded below its quarterly moving average by 5% but immediately regained this level, and was at new all-time highs within 13 months following this re-test. Within 18 months following the re-test, gold was up over 70%, and we are currently at this critical juncture if this pullback continues.

Currently, this key moving average comes in near $1,690/oz, and this is the level we want to see the bulls defend. A breakdown below this level is not the end of the world, but regaining it within a month would be ideal. Assuming that this is just a shakeout and a replay of the 2008 correction, we could see gold at $2,100/oz in Q1 of next year, and potentially as high as $2,600/oz if it follows the 2008 playbook.

Obviously, there's no guarantee that past performance mirrors the action of the previous two breakouts. Still, I don't see any reason to give up on the big picture unless the metal breaks down towards $1,650/oz and is unable to bounce at all.

The good news is that coupled with this significant re-test of a major breakout level; we also have the worst sentiment we've seen in years. This is evidenced by bullish sentiment for gold finishing last week at below 15% bulls and likely to hit single-digit levels if this correction continues. Similar to the technicals, there's no reason that sentiment can't get worse and head a little lower before a bottom is struck. However, this sentiment indicator would argue that the worst is likely over this correction, and it's time to be open-minded for a bottom, rather than get caught up in the sentiment that gold is worthless and could head back to $1,400/oz.

Graphical user interface Description automatically generated

(Source: Daily Sentiment Index Data, Author's Chart)

So, what's the best course of action?

I remain long gold from an average price closer to $1,450/oz and have not added to my position yet. This is because I am waiting for a reversal or bullish setup to add to my position, which would increase the probability that the lows are in. However, with many gold producers trading for less than 10x earnings, I continue to add to my position in Kirkland Lake Gold (KL), with the stock set to report $3.90 in annual EPS in FY2021, sitting on over $4.00 in cash, yet trading at just $32.00 per share.

This leaves the company trading at barely 7.2x earnings, and sentiment surrounding the stock is the worst it's been in years due to anxiety about one of its mines running out of reserves.

Given the company's track record of replacing reserves and making significant discoveries, I believe the worries about its Fosterville Mine are priced at current levels. Besides, if we do see a major discovery at its Fosterville Mine, we could see the stock up over 10% overnight, given that the current valuation has basically written the mine off. It's worth noting that the stock pays a more than 2.30% yield at current prices as well and has one of the most aggressive buyback programs in the industry, with the potential to buyback over 7% of its float. Given that I'm being paid to wait with KL, this is one area where I continue to add, and I have an average cost closer to $37.00.

While the stock could head lower, I see much more upside with KL than I do with the gold price, so this is where I remain focused. Looking ahead, I don't see any reason to give up on this gold bull market, and I would expect any dips to $1,650/oz will likely get bought up, and I may look to add to my position here.

Disclosure: I am long GLD, KLDisclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas? 9 "MUST OWN" Growth Stocks for 2021 How to Ride the 2021 Stock Market Bubble 7 Best ETFs for the NEXT Bull Market 5 WINNING Stocks Chart Patterns
The SPDR Gold Shares (GLD) rose $0.30 (+0.19%) in premarket trading Tuesday. Year-to-date, GLD has declined -9.12%, versus a 4.10% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #12 of 36 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD March 2, 2021 9:41am

As March Rolls to April, Crude Oil Continues to Rise

  • Crude oil has come a long way
  • What a difference a year makes- A risk at the start of March
  • The 2021 driving season is bullish for demand
  • Any surprises could be on the upside
  • UCO turbocharges USO, but leverage comes at a cost
Crude oil futures reached a new high of $63.81 on the continuous NYMEX futures contract on February 25. March NYMEX futures rolled to April earlier this month. During the roll period, crude oil experienced so light selling pressure. After a brief pullback to below the $60 level that ended on February 19 and 22, crude oil had been back on the bullish stairs making new highs until last Friday when the price corrected but remained above the $60 level. Bull markets rarely move in a straight line, but NYMEX crude oil futures have been moving steadily higher since reaching a low of $33.64 per barrel on November 2. We are coming up on the first anniversary of unprecedented price carnage in the oil market. On April 20, 2020, the expiring May contract did what some unfortunate market participants believed unthinkable. The price not only dropped below zero but to a low of negative $40.32 per barrel as the energy commodity became a bearish hot potato. After storage capacity filled, there was nowhere for longs to deliver oil in Cushing, Oklahoma, last April. WTI crude oil futures were over $100 per barrel higher than the late April 2020 low at the end of February. The energy commodity's trend remains higher as of the start of March 2021. The ProShares Ultra Bloomberg Crude Oil product (UCO) turbocharges a portfolio of NYMEX futures contracts on the upside. Crude oil has come a long way The bullish trend in crude oil continued to take the price of the energy commodity to higher highs at the end of February.

Source: CQG

As the chart daily chart of April futures highlights, over the past four months, since the November 2 low, April NYMEX crude oil futures rose from $35.53 to $63.81 or nearly 80%. Open interest, the total number of open long and short positions in the NYMEX futures market, has increased with the energy commodity's price. The metric was at just over the two million contract level in early November and rose to over 2.50 million at the end of last week. Rising price and increasing open interest tend to be a technical validation of a bullish trend in a futures market. Price momentum and relative strength metrics remain near overbought conditions and turned lower after the latest, February 26, correction. The rise in daily historical volatility from below 19% on February 17 to over 45.5% reflects the wider trading ranges in the crude oil futures arena as it approached the next critical technical resistance level. What a difference a year makes- A risk at the start of March The next target for the NYMEX crude oil futures market stands at the early 2020 high at $65.65 per barrel.

Source: CQG

The long-term monthly chart illustrates that crude oil hit its highest price since April 2019 in January 2020. The price closed at the end of February 2020 at $45.26 per barrel, 26.4% below the closing level one year later at $61.50. All technical metrics continue to support the bullish trend. After putting in a bullish reversal trading pattern on the monthly chart in November 2020, the price followed through on the upside.  

Source: CQG

The quarterly chart shows that NYMEX crude oil futures put the same bullish reversal pattern in Q4 and followed through on the upside in Q1 as crude oil moved towards a challenge of the 2020 peak. Meanwhile, crude oil could face a rocky road in March if the stock market corrects. Stocks and crude oil have been moving in lockstep since the March 2020 low in equities and the April 2020 bottom in the energy commodity. A sign that stocks could experience selling is coming from the bond market. Even though the Fed is purchasing $120 billion in debt securities each month, short-term rates are at zero percent, and the central bank continues to report that inflation is below its average 2% target rate, the bond market has become a falling knife.  

Source: CQG

The weekly chart shows that the US 30-Year Treasury bond futures contract fell below the 158-00 level last week for the first time since January 2020. Rising interest rates further out along the yield curve could cause capital to flow from stocks to bonds, which could weigh on oil prices. However, the decline in the bond market is a sign of inflationary pressures, which could have the opposite impact on the crude oil market. As stocks declined late last week, the bond market recovered. Fasten your seatbelts for a wide ride in the crude oil market, as many conflicting signals could cause price variance to increase. We are heading into March with bullish winds behind the energy commodity's sails, the complete opposite than at this time in 2020. The 2021 driving season is bullish for demand The peak season for gasoline demand occurs from the spring through the fall each year. As vaccines create immunity to the virus, the 2021 driving season is likely to be a lot more active than last year's. The price action in the gasoline futures market supports more demand for the fuel.

Source: CQG

The daily chart shows that April gasoline futures rose from $1.1184 on November 2 to nearly $2 per gallon wholesale late last week.  

Source: CQG

Meanwhile, the weekly gasoline crack spread chart illustrates the rally from $10.41 in early February to $20.30 per barrel at the end of last week. Gasoline has outperformed crude oil over the past four months in a sign that demand in 2021 will be far more robust than in 2020. Rising gasoline requirements translate to more demand for crude oil. Any surprises could be on the upside As the US hands control of the international petroleum market back to OPEC+, the odds of higher prices are rising. Meanwhile, with half the world's crude oil reserves, the Middle East remains the most turbulent political region on our planet. US energy independence made the oil price less sensitive to Middle Eastern events. Meanwhile, declining US output hands the pricing baton back to the Saudis, Russians, and other OPEC members. According to the Energy Information Administration's latest report, US output dropped to 9.7 million barrels per day for the week ending on February 19. US production was nearly 26% below the record high from March 2020 at 13.1 mbpd. While the recent drop is likely weather-related, US production will decline because of the shift in energy policy under the Biden administration. The bottom line is that the oil price is far more sensitive to production levels worldwide than over the past years. Any hostilities in the Middle East that impact production, refining, or logistics could cause significant rallies. Surprises in the oil market are likely to push the price of the energy commodity higher. UCO turbocharges USO, but leverage comes at a cost The United States Oil Fund (USO) is the most liquid ETF product that replicated the short-term price action in a portfolio of NYMEX crude oil futures. The UCO is a short-term trading tool that turbocharges the price action in the USO. The fund summary and top holdings of UCO include:

Source: Yahoo Finance

UCO has net assets of $902.74 million, trades an average of over 2.46 million shares each day, and charges a 0.95% expense ratio. Nearby April NYMEX crude oil futures rose from $57.31 on February 12 to $63.81 on February 25 or 11.3%.  

Source: Barchart

Over the same period, UCO moved from $49.53 to $59.33 per share or 19.8%. UCO is only appropriate for short or medium-term risk positions in the crude oil market as the price for leverage is time decay. Crude oil continued on its bullish path at the end of last week despite Friday's selloff. Watch the stock market for clues if oil's correction will become deeper in early March. The next technical upside target stands at the 2020 $65.65 high. Want More Great Investing Ideas? "MUST OWN" Growth Stocks for 2021 How to Ride the 2021 Stock Market Bubble 7 Best ETFs for the NEXT Bull Market 5 WINNING Stocks Chart Patterns
The ProShares Ultra Bloomberg Crude Oil (UCO) was trading at $55.25 per share on Monday morning, down $0.08 (-0.14%). Year-to-date, UCO has gained 52.33%, versus a 3.63% rise in the benchmark S&P 500 index during the same period. UCO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #70 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:UCO March 1, 2021 10:21am

Brent Crude Oil’s Bullish Developments, Approaching Important Level

  • Brent's premium remains steady at above the $3 level

  • Brent's next test is at January 2020 high

  • Brent is OPEC's price

  • Iran could cause supply problems

  • The BNO ETF tracks the world's leading benchmark

Brent crude oil is the petroleum that comes from the North Sea, a shallow, northeastern arm of the Atlantic Ocean, between the British Isles and the mainland of northwestern Europe. Brent is a benchmark in the oil futures market. The futures trade on the Intercontinental exchange. Petroleum from Europe, Africa, and the Middle East use the Brent benchmark for pricing.

Brent is a light crude oil, but not as light as WTI or West Texas Intermedia, the crude oil traded on the CME's NYMEX division. Brent contains around 0.37% of Sulphur, a higher level than WTI. While WTI (USO) is preferable for refining into gasoline, Brent is more suitable for distillates, such as heating oil, jet, and diesel fuels.

Approximately two-thirds of the world's petroleum output employs the Brent price as a benchmark. WTI accounts for the other third.

Since Brent is the pricing mechanism for Middle Eastern oil, it is sensitive to political events in the turbulent region. Therefore, the Brent versus WTI spread also reflects political risk for the energy commodity when it comes to production, refining, and logistical factors in the Middle East, the home to over half the world's crude oil reserves.

The United States Brent Crude Oil Fund (BNO) tracks the price of Brent crude oil futures.

Brent's premium remains steady at above the $3 level

Over past decades, WTI typically traded at a premium to Brent crude oil. Gasoline is the most popular fuel; WTI's composition makes it the crude oil of choice for refining into the product that powers vehicles. Meanwhile, OPEC and Russia had a dominant role in supplying the world. As production from the Middle East and Russia rose, it depressed the price of Brent compared to the WTI, North American crude oil.

Source: CQG

The chart shows that Brent mostly traded a discount to WTI before 2010. In 2010, the Arab Spring changed everything as political shifts in North Africa and the Middle East caused supply concerns, sending oil higher and Brent to a significant premium above WTI of over $27.50 per barrel in 2011. Meanwhile, over the next decade, the US moved towards energy independence and became the world's leading oil-producing nation.

In March 2020, daily output reached a record 13.1 million barrels per day, exceeding Saudi Arabia's and Russia's daily production. The shift in production dynamics caused Brent to trade at a consistent premium to the US WTI crude oil over the past decade. Meanwhile, a rising Brent premium has been a mostly bullish sign for petroleum's price over the past decade. The Brent premium was at the $3.67 level at the end of last week.

Brent's next test is at the January 2020 high

In late October and early November, the Brent premium shrunk to below $2 per barrel as NYMEX crude oil fell towards the November 2 low of $33.64 per barrel.

Source: CQG

As the chart illustrates, in 2021, as crude oil moved higher, the Brent premium over WTI has traded in a range between $2.57 and $3.77 per barrel. At over the $3.30 level at the end of last week, Brent's premium is trending higher with the price of crude oil and is moving towards the early January 2021 peak.

When it comes to Brent crude oil, the outright price continues to move higher and towards a challenge of its next critical resistance level.

Source: Barchart

The chart shows that after falling to the lowest price this century at $16 per barrel in March 2020, Brent futures made a higher low at $35.73 on November 2. On February 19, Brent was trading just below the $63 level, as it surpassed its first level of technical resistance at the February 20, 2020 high of $60.02. The next upside target stands at the 2020 peak of $71.99 per barrel.

The rising Brent premium over WTI tends to be a bullish sign for the oil market.

Brent is OPEC's price

When the international oil cartel analyzes the petroleum market, they use the Brent benchmark. Two-thirds of the world's producers and consumers price output and requirements using the Brent price.

OPEC's mission is:

"In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."

Source: https://www.opec.org/opec_web/en/about_us/23.htm

The cartel's members work together to construct production policies that maximize their revenues. Over the past years, Russia has become an influential non-member. OPEC+ does not make a move without consultation with Moscow.

The bottom line on OPEC is the cartel's only interest is the highest petroleum price possible that balances the market's fundamental equation.

As US energy policy shifts towards a greener path, the pricing power will move back into the cartel's hands. In March 2020, US output rose to a record 13.1 million barrels per day, more than Saudi Arabian or Russian daily production. A move away from US hydrocarbons in the US increases the cartel's powers in the global energy arena. According to the EIA, as of February 12, US output stood at 10.8 mbpd. We are likely to see US production continue to decline.

Iran could cause supply problems

The crude oil price is rallying because of several factors. Central bank liquidity and government stimulus are weighing on money's purchasing power. The US dollar, the world's reserve currency and pricing mechanism for petroleum, has been falling since March 2020. Inflationary pressures are mounting at a time when optimism over the end of the global pandemic is rising. The prospect for lower US output is pushing the oil price higher.

Meanwhile, Iran remains a clear and present danger in the Middle East. The Saudis and Iranians are mortal enemies in the region. While Russia stands between the two, the potential for rising hostilities remains high. Any outbreaks that impact production, refining, or logistics in the area could cause a sudden upside price spike in the oil futures market. Crude oil will become a lot more sensitive to supply concerns as US output drops. Events in the Middle East are most likely to affect the Brent futures market.

The BNO ETF tracks the world's leading benchmark

The United States Brent Crude Oil Fund (BNO) tracks Brent's price. BNO's top holding and fund summary include:

Source: Yahoo Finance

BNO has net assets of $348.27 million, trades an average of 727,855 shares each day, and charges a 0.90% expense ratio. Since November 2, 2020, the continuous Brent futures contract rose from $35.73 to its most recent high of $65.49 or 83.3%.

Source: Barchart

Since late October 2020, BNO rose from $9.34 to $16.08 per share or 72.2%. The expense ratio and cost of rolling futures contracts cause BNO to underperform the price of Brent futures. However, the product is a proxy for those who do not venture into the futures arena.

The trend in crude oil is higher. The rising Brent premium over WTI is a sign that the rally is not over.

Want More Great Investing Ideas?

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The United States Oil Fund (USO) was trading at $40.80 per share on Monday morning, up $1.12 (+2.82%). Year-to-date, USO has gained 23.60%, versus a 3.73% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #70 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO February 22, 2021 10:00am

Gold: Bull Market Correction Or New Bear Market?

It's been a tough start to the year for investors in the gold (GLD) space, with the metal, unfortunately, being one of the only asset classes with a negative year-to-date return. This poor performance is even though this 6-week period is generally one of the strongest of the year for gold, with the metal typically gaining more than 3% in the first eight weeks of the year.

Not surprisingly, this lethargic performance has much thought that we've seen peak gold prices as of August above $2,000/oz and that this might be the start of a new bear market. While anything is possible, the data suggest this isn't likely the case, because silver (SLV) is acting the exact opposite of how we would expect if this bull market was already past its expiry date. Let's take a closer look below:

Chart Description automatically generated

(Source: TC2000.com)

In August, I noted that it was a dangerous time to add new exposure to the sector, given that gold was flashing sell signals on its daily chart. These signals typically show up when price targets are being raised across the sector, and when the metal is seeing frothy sentiment, with many expecting much higher prices over both the short-term and medium-term. However, while I was expecting a 12% correction in the metal to reset sentiment, this correction's length and depth have been a little more than I had anticipated. Unfortunately, this has put a massive dent in the Gold Miners Index (GDX) and led to many giving up on the sector altogether.

The good news is that this complete reversal in sentiment and despondency typically breeds durable bottoms, and silver is not following the metal to new multi-month lows. In fact, it's up nearly 5% year-to-date and massively outperforming the yellow metal. In the past, this has been a bullish indicator, which we'll take a look at below:

A computer screen capture Description automatically generated with medium confidence

(Source: TC2000.com)

As we can see in the chart above, silver has made new highs relative to gold on two occasions in the past six months and has also made a major higher low vs. the metal after breaking out from a multi-year downtrend. During the peak of the last bull market (below chart), silver peaked vs. gold in April 2011, made a new lower low vs. gold in June 2011, and made a substantially lower high vs. gold just before the peak in August 2011.

This suggested that the bull market was in its final leg and that the move higher in gold was an opportunity to sell into strength. Given that we currently see the exact opposite, this points to a higher probability of this being a violent intermediate correction versus the start of a new bear market. So, as long as the gold/silver ratio remains below 80, I don't see any reason to lose any sleep.

A screenshot of a computer Description automatically generated with medium confidence

(Source: TC2000.com)

If we look at a bigger picture chart of gold, this also suggests that there's no reason to panic because the metal remains above its previous all-time high quarterly close and in a clear uptrend. No asset classes go up in a straight line (except Bitcoin), and we can see that gold was up for eight quarters in a row and has now been digesting this gain in Q4 and Q1. This is entirely normal, even during a bull market, and is actually healthy because it provides fuel for the next leg up.

When a market continues to climb without any doubt or pessimism, it's unable to climb a wall of worry, and this is generally when it's time to be cautious. So, while this correction has torpedoed bullish sentiment in the space and left many miners 30% off their highs, it's the best thing for this market, as long as gold can defend the $1,700/oz level.

Chart Description automatically generated

(Source: TC2000.com)

So, what's the best course of action?

While silver miners are in vogue and receiving all the press lately, I continue to see the best value among established gold producers, with the stand-out value names being Kirkland Lake Gold (KL) and Alamos Gold (AGI). Both of these names are trading for below 10x FY2021 annual EPS estimates, paying between a 1.25% to 2.25% dividend yield, and have significant net cash positions, allowing them to buy back shares if this weakness in the sector continues. Obviously, valuations alone do not preclude lower prices, but this looks like a low-risk buying opportunity, especially because these names typically trade at above 15x earnings. Clearly, I was early to buy Kirkland Lake Gold as I began buying near $44.00, but I have been adding to my position recently on weakness and have an average cost closer to $40.00.

For those interested in the metal, I continue to see it as a Hold and remain long from $1,450/oz. If we were to see gold tumble below $1,700/oz, I may look to add to my position because the metal would hit oversold levels across multiple time-frames. For now, I think the miners are the much better bang per buck, and I continue to accumulate the best names on weakness.

Disclosure: I am long AGI, KL, GLD

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas? 9 "MUST OWN" Growth Stocks for 2021 4,000 or Bust for S&P 500! 7 Best ETFs for the NEXT Bull Market 5 WINNING Stocks Chart Patterns
The SPDR Gold Shares (GLD) fell $0.47 (-0.28%) in after-hours trading Tuesday. Year-to-date, GLD has declined -5.67%, versus a 4.93% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #16 of 36 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD February 16, 2021 6:36pm

Can Crude Oil Reach $100 Again?

  • The world's leading producer hands the pricing baton to its old foes

  • OPEC+'s mission is the highest possible price

  • The trend is higher

  • The world continues to depend on the fossil fuel

  • A demand surge could be explosive- Bull markets tend to exceed expectations

The last time NYMEX crude oil futures traded above the $100 per barrel level was 2014, when the energy commodity reached a high of $107.73. Since crude oil futures began trading on the CME's NYMEX division in 1983, the price was above the century mark in five years out of thirty-eight. The all-time came in 2008 at $147.27 per barrel. From 1983 through 2004, the high was $41.15.

2020 was a wild year in the crude oil market. Energy demand evaporated as the global pandemic descended on the world. Crude oil fell steadily from a high of $65.65 in early January through April, but the real fireworks came on April 20 when the price declined below zero for the first time and fell to a low of an incredible negative $40.32 per barrel. A pipeline in Cushing, Oklahoma, is the delivery point for NYMEX WTI futures, making it a landlocked crude oil. As demand disappeared, petroleum filled storage capacity. As the May contract moved towards expiration, those holding long positions had nowhere to store the oil, forcing longs to sell at any price. Since then, crude oil has climbed steadily, reaching the highest price in over a year last week.

Supply fundamentals are undergoing a significant change in 2021, which could put the $100 level back within reach for only the sixth time in almost four decades. The United States Crude Oil Fund (USO) holds a portfolio of NYMEX crude oil futures contracts.

The world's leading producer hands the pricing baton to its old foes

In March 2020, US petroleum production reached an all-time peak of 13.1 million barrels per day. The global pandemic that caused the oil price to plunge led to a decline in US output. Meanwhile, other leading producers, Saudi Arabia and Russia, together with OPEC members, slashed production to balance the global oil market's supply and demand equation.

The change in US administrations caused a substantial shift in energy policy. On his first day in office, President Joe Biden canceled the Keystone XL pipeline project that brings petroleum from the oil sands in Alberta, Canada, to Steele City, Nebraska. More regulations are on the horizon in the US, which translates to falling production. As of February 5, daily US output stood at 11 million barrels per day, a 16% decline from the high. Production is not likely to return to the previous high as the US takes a greener path towards energy production and consumption.

Meanwhile, vaccinations are likely to bring an end to the global pandemic over the coming months. As the world emerges from the threat to the economy created by the coronavirus, people will begin traveling, and energy demand will increase. We could see a sudden surge in crude oil demand over the coming months. For decades, US energy policy worked to achieve energy independence from the Middle East and Russia. The shift in policy could hand the pricing power back to OPEC+ over the coming months and years.

OPEC+'s mission is the highest possible price

OPEC is the international oil cartel. Starting in 2016, when the oil price dropped below $30 per barrel, the cartel worked with Russia to establish an output policy. The Russians saw a window of opportunity to influence the crude oil price by cooperating with the other leading world producers, sans the United States. Moreover, President Vladimir Putin likely viewed cooperation with OPEC as an opportunity to increase his sphere of influence in the Middle East. Through his oil minister, Alexander Novak, President Putin positioned a bridge between Iran and Saudi Arabia, OPEC members, and mortal enemies in the region. Since 2016, the Russians have approved and participated in production decisions. OPEC has not made a move without Russian involvement.

OPEC's website states:

"In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."

The bottom line is that OPEC's mission is to maintain a production policy that creates the highest return for its members. The shift in US policy only supports OPEC+'s mission to increase the oil price. According to analysts at Goldman Sachs, Saudi Arabia's breakeven price to balance its budget in 2021 is $66 per barrel. The Brent price recently moved over the $60 per barrel level. When it comes to the Saudis and the Russians, the higher the oil price, the better.

The trend is higher

After a correction to a low of $33.64 per barrel in early November 2020, crude oil's price has been on the stairs higher.

Source: CQG

As the chart highlights, last week, nearby NYMEX crude oil futures traded to a high of $59.82 per barrel. The next upside target above the $60 psychological level is at $65.65 per barrel, the 2020 peak. Above there, the 2018 high at $76.90 would become the next technical target for the energy commodity. A move above there would create a multi-year breakout with $100 per barrel within reach.

As the monthly chart shows, the spike lower in April 2020 created a significant bottom in the oil futures market. Price momentum and relative strength indicators are rising towards overbought readings in the long-term chart. The metrics can remain at an overbought condition for extended periods. The total number of open long and short positions in the oil futures market has been rising with the price of the energy commodity, which tends to validate a bullish trend in a futures market. Open interest has risen from just over two million contracts to 2.471 million contracts as of the end of last week. Monthly historical volatility declined from over 120% in 2020 to below 93%. Daily historical volatility dropped to the 20.32% level at the end of last week. The measure of price variance has been trending lower as crude oil's price continues to take a staircase to the upside.

The world continues to depend on the fossil fuel

Despite the shift in US energy policy, hydrocarbons continue to power the world. While that may change in the years ahead, the pandemic's end will increase the demand for crude oil products like gasoline and distillates.

China and India are the world's most populous countries, and both consume oil and oil products. In the US and Europe, most automobiles, trucks, and other transportation modes rely on crude oil for power. Last week, General Motors told the world it would shift from gasoline-powered vehicles to EVs by 2035, but that is fourteen years away. Over the coming months and years, crude oil will continue to power the world.

A demand surge could be explosive- Bull markets tend to exceed expectations

The aftermath of COVID-19 could create a demand surge in the oil market. Saudi Arabia and Russia control OPEC, and both producers would rather sell less oil at higher prices than more oil at lower ones. The US policy shift will make OPEC+'s decisions far more significant for the price of the energy commodity.

As a sign of its increasing influence, a surprise additional one million barrel per day production cut from Saudi Arabia in January helped push the oil futures price higher. The Saudis and Russians may have dipped a toe into the oil market to watch the price action after the announcement. The results handed the oil-producing countries information that they now have far more control than in the past years.

As we learned on April 20, 2020, when nearby NYMEX futures moved below zero and Brent futures fell to the lowest level of this century at $16 per barrel; bear markets tend to send prices to levels that are far below expectations. Bull markets often do the same on the upside. The current trend in crude oil is higher. The energy commodity has not traded above the $100 level since 2014, and many analysts have forecast that we will never see that level again. However, if last year taught us anything, it is never to say never.

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The United States Oil Fund (USO) was trading at $40.22 per share on Tuesday morning, up $0.28 (+0.70%). Year-to-date, USO has gained 21.84%, versus a 5.40% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #71 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO February 16, 2021 11:08am

Crude Oil Rises Above Another Technical Level

  • Crude oil takes out a technical resistance level on the weekly chart

  • The factors that point to higher

  • The threats that could create a selloff

  • Bulls are winning, but it will be a bumpy road higher

At this time in 2020, crude oil was on a path to a price below zero for the first time on the NYMEX crude oil futures market. The energy commodity began last year with a high at $65.65 per barrel as the US and Iran faced off in Iraq. The Iranians retaliated against the US after the killing of a top Iranian general. The situation calmed, and oil began to decline. By the end of January, nearby futures closed at $51.63. On the final day of February, the price had dropped to $45.26, and the last session of March closed at $20.10. On April 20, crude oil was over $60 lower at negative $40.32 and closed the month at the $19.09 level.

Since those four months of price carnage, the energy commodity recovered, rallying in seven of the last nine months. At the end of January 2020, the price was sitting at $52.14 per barrel, and the trend remained higher. Since the week of January 11 through the end of last month, nearby NYMEX futures had sat in a tight range from $51.44 to $53.93 per barrel. Last week, the petroleum futures in the US eclipsed a technical target. The crude oil futures market has gone into a coma as bullish and bearish factors pull it in opposite directions. The United States Crude Oil Fund (USO) holds a portfolio of NYMEX futures.

Crude oil takes out a technical resistance level on the weekly chart

Since early November, when nearby NYMEX crude oil futures corrected to $33.64 per barrel, the price steadily climbed higher. On February 2, Groundhog Day, the energy commodity rose to a one-year high as it surpassed the peak from the week of February 18, 2020.

Source: CQG

As the weekly chart highlights, technical resistance stood at $54.50 per barrel. On February 2, NYMEX futures rose to a high of $55.26, which was a technical breakout. The total number of open long and short positions in the NYMEX crude oil futures market rose from 2.054 million during the week of November 16 to 2.459 million contracts at the end of last week as the price increased. Rising open interest as the price appreciates is typically a technical validation of a bullish trend in a futures market.

Price momentum and relative strength metrics are sitting in overbought territory at the end of last week. Weekly historical price volatility at 28.8% reflects the steady nature of the rally. Crude oil has been taking the stairs higher since early November over the past three months. Nearby March futures settled at $56.85 on February 5, just under the high for last week at $57.29 per barrel.

The factors that point to higher

Three significant factors are pushing crude oil higher.

  • Optimism that the world is coming close to the end of the global pandemic is increasing the energy demand.

  • The tidal wave of central bank liquidity, low-interest rates, and government stimulus are inflationary. The economic condition eats away at fiat currencies' values, which is bullish for all commodity prices, and crude oil is no exception.

  • A decline of US fossil fuel production under the Biden administration will reduce supplies in the near term while the world continues to depend on petroleum as an energy source. Moreover, the US's shift towards a greener path hands the pricing power in the oil market back to Saudi Arabia, Russia, and other OPEC members and world producers.

Fundamentals are mostly bullish for crude oil, and the trend remains higher as of the end of the first week of February 2021.

The threats that could create a selloff

Three factors could derail the current rally in the crude oil futures arena:

  • Bubblicious activity in the stock market could weigh on crude oil as stocks and the energy commodity tend to have a high correlation.

  • COVID-19 continues to infect people worldwide as cases rise along with fatalities. New strains of the virus could be resistant to current vaccines. The pandemic continues to have the potential to weigh on the global economy.

  • Crude oil has a long history of taking the stairs higher and an elevator shaft to the downside during corrections. The potential for a correction rises with the price. The continuous contract has risen from $33.64 in early November to $57.29 last week, or over 70%.

Bulls are winning, but it will be a bumpy road higher

The technical trend in the crude oil futures arena, together with supply and demand fundamentals, created the environment that took the energy commodity's price above a technical resistance level last week. The next critical upside target stands at the 2020 high of $65.65 per barrel. Crude oil futures would likely run into some congestion at the psychological $60 level.

The bullish trend in the oil market is entering its fourth month. While the energy commodity continues to take the stairs higher, the risk of a correction will continue to increase with the price. I remain bullish on crude oil but will raise stops on long positions as the price continues to grind higher.

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The United States Oil Fund (USO) was trading at $38.53 per share on Monday morning, up $0.34 (+0.89%). Year-to-date, USO has gained 16.72%, versus a 4.10% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO February 8, 2021 9:56am

Gold Plunges Despite Bullish Catalyts

It's been a rough start to 2021 for the gold (GLD) bulls despite a Blue Wave in the United States that is likely to keep stimulus high for the next two years and the appointment of a former dove, Janet Yellen, as Treasury Secretary.

This continued underperformance Is likely extremely frustrating for the bull camp, with several discussions of the markets being rigged, manipulated, and metals being unfairly suppressed in every possible manner. There's no debating that games are played occasionally, but it's important to note that the pattern gold is building is not unusual, whether it's the result of manipulation or not.

This is because asset classes often re-test their multi-year breakout levels after hitting new all-time highs, and this is typically the last chance to get great entries before the more exciting middle and late innings of a new bull market. So, while it might be easier to cry manipulation, it makes more sense to embrace the manipulation and start positions while the asset class is hated because this won't last forever. Let's take a closer look below:

Chart, histogram Description automatically generated

(Source: TC2000.com)

As shown in the chart above, gold broke out to a new all-time high in Q3 2020 and has been trading in a choppy range since, with a 15% correction from its highs. However, while this correction has been treacherous to those focused on short-term time frames, we haven't seen any real technical damage to date for gold, with the metal looking like it's building a handle to its large 10-year cup base.

This is quite normal after a near 80% advance like we saw since the 2018 low ($1,150/oz), but the key is that this correction does not break below the rising quarterly moving average. Currently, the quarterly moving average comes in near $1,680/oz, and a break below here would be a bearish development. As we can see, the metal broke below this key moving average on a quarterly basis a year after the previous bull market (2002-2011), and this led to a sharp decline and multi-year market in gold.

Therefore, as long as $1,680/oz is defended on a monthly closing basis, the trend is the bull's friend here. Having said that, I would prefer to see gold hold above $1,760/oz to rule out the potential of a test of this key moving average.

Chart, histogram Description automatically generated

(Source: TC2000.com)

If we look at the sentiment below, we can see that the bulls are quite despondent, with bullish sentiment below 50% even though gold was up more than 24% last year. In fact, gold outperformed the S&P-500 (SPY) last year yet entered 2021 with a sentiment reading of barely 25% bulls vs. S&P-500 sentiment of closer to 80% bulls.

This is great news for investors looking for a contrarian trade because the best time to buy is when an asset class is hated but still in a long-term uptrend. Ideally, I would like to see bullish sentiment fall back below 25% bulls, which would likely require a test of the $1,750/oz to $1,760/oz level. However, with the multi-month moving average for sentiment below 40% bulls, we already have conditions in place for a durable bottom to this correction. So, while the correction may not be over just yet, I would argue that the worst of it is certainly over from a price standpoint.

Graphical user interface Description automatically generated with low confidence

(Source: Daily Sentiment Index Data, Author's Chart)

So, what's the best course of action?

I continue to see owning Tier-1 jurisdiction gold producers as the best way to playing the gold trade, with the two most attractive names being Alamos Gold (AGI) and Kirkland Lake Gold (KL). Both companies pay 1.25% plus dividends, are trading at less than 10x FY2021 annual EPS estimates, and have significant net cash positions, giving them the flexibility to increase their dividends and do share buybacks. Both companies currently have 5% share buyback programs in place and have a history of supporting their share price on deep pullbacks. For those that prefer to own the metal, I would view any pullbacks below $1,750/oz as low-risk buying opportunities, with risk clearly defined on any monthly close below $1,680/oz.

Chart, bar chart Description automatically generated

(Source: Author's Chart, Kirkland Lake Gold Company Filings)

This multi-month correction has understandably battered sentiment in the sector, but with gold producers trading at their lowest price to earnings and price to free cash flow ratios since their 2015 lows, I see this as a time to begin starting new positions in the best names. Therefore, I have added to my KL and AGI positions this week, and I may look to add to my position in gold if we see further weakness and more of a wash-out in sentiment.

Disclosure: I am long GLD, KL, AGI

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The SPDR Gold Shares (GLD) was trading at $167.81 per share on Thursday afternoon, down $4.04 (-2.35%). Year-to-date, GLD has declined -5.92%, versus a 2.94% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #16 of 35 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD February 4, 2021 12:44pm

Crude Oil Stalls Under Critical Resistance Level

  • NYMEX oil futures come within 57 cents of an upside target

  • The crude oil futures market faces bullish and bearish forces

  • OPEC+ becomes more influential after the US power transition

  • A pullback would not be a surprise

  • Surprises are likely to come on the upside

We learned that markets can decline to illogical levels on April 20 when nearby NYMEX crude oil futures fell below zero and to under negative $40 per barrel. Crude oil futures recently came close to a critical technical resistance level on the now active month March futures contract.

The path of least resistance for the crude oil price is a function of many factors. Fundamental supply and demand pressures impact the energy commodity's price. Term structure or the forward curve often provides clues about supplies. When they tighten, the curve moves towards backwardation, where nearby prices command a premium to prices for deferred delivery. Quality and location spread like the differential between Brent and WTI can shed light on demand. Processing or crack spreads also tell us about the requirements for oil products, which are consumer products that reflect economic conditions. Technical factors, such as momentum and trends, are excellent guides for the herd behavior that highlights the wisdom of the crowd. When buyers become more aggressive than sellers, prices tend to move higher and vice versa.

As we head into the second month of 2021, the crude oil futures market will begin to look forward to the spring season and the start of the driving season in the US when gasoline demand begins to rise. The global pandemic continues to hang over crude oil and markets across all asset classes in early 2021, adding another dynamic to making price projections. Over the past weeks, crude oil stalled just below the level that would provide another bullish technical validation of the trend that has been in place since late April 2020.

The United States Crude Oil Fund (USO) tends to move higher and lower with the price of a portfolio of NYMEX crude oil futures contracts.

NYMEX oil futures come within 57 cents of an upside target

The most recent high in the nearby NYMEX crude oil futures contract came on January 13 at $53.93 per barrel.

Source: CQG

As the chart highlights, the first level of technical resistance facing WTI crude oil futures is at the mid-February 2020 high at $54.50 per barrel. The price came within 57 cents of the level. At the end of last week, nearby futures were at the $52.20 level and were hanging around the recent high as the price consolidates.

Open interest has moved higher with the price of the energy commodity. The total number of open long and short positions rose from 2.039 million contracts on November 2 when the March futures contract hit a low of $35 per barrel. On January 28, the open interest metric was at 2.339 million contracts, 14.7% higher with the price at the $52.20 level, over 49% higher than at the start of November. Increasing open interest as the price rises is a technical validation of a bullish trend in a futures market. Weekly price momentum and relative strength indicators were in overbought territory and flatlining at the end of last week, while daily historical volatility declined from 50.53% on November 2 to the 26.8% level.

The crude oil futures market faces bullish and bearish forces

With crude oil flirting with another technical level that could launch the price higher and towards $60, bullish and bearish factors pull the energy commodity in opposite directions.

The rising number of coronavirus cases continues to be the most significant bearish factor for crude oil as it weighs on the fundamental equation's demand side. The overbought technical conditions on the weekly chart are a sign that a correction could be on the horizon.

We are also in the heart of the winter season in the US, which tends to be a time of the year when the oil market experiences weakness. Stock market volatility tends to be bearish for the oil price.

Meanwhile, optimism that vaccines will create herd immunity has been a bullish factor for the oil market. The one million barrel per day surprise production cut from Saudi Arabia supported the price and was a sign that pricing power is shifting back to the Middle East and Russia as US energy policy moves towards support for a greener path of alternative energy sources under the Biden administration. OPEC+ always seeks to deliver the best possible return for its members, which translates to higher crude oil prices.

OPEC+ becomes more influential after the US power transition

Increasing energy regulations in the United States are on the horizon. At the start of his term in office, President Biden rejoined the Paris Climate Accords and canceled the Keystone XL pipeline project. On the campaign trail, the President pledged to reduce hydrocarbon production and consumption in the US. With Democrats in the majority in the House of Representatives and a slim margin in the Senate, energy policy will dramatically shift from the past four years. The administration will seek to ban fracking on federal land and install a regulatory regime that causes production costs to increase and output to decline.

The US became the world's leading oil-producing nation over the past years, with daily output rising to a record 13.1 million barrels per day in March 2020. We are not likely to see that level of production again any time soon. We could see production decline because of increased regulations at a time when the world emerges from the global pandemic. At the end of last week, the EIA reported that daily output was at the 10.9 mbpd level. As people begin to travel and businesses get back to normal, the energy demand will increase. As US output decreases, OPEC and Russia will step in to meet the world's requirements. The US remains a massive petroleum consumer, so higher prices could be on the horizon if the US needs to import crude oil over the coming months and years.

Moreover, the tidal wave of central bank liquidity, a tsunami of government stimulus programs in the trillions, and a falling dollar are all highly inflationary and bullish for the price of crude oil and all commodities. The bottom line is that falling US output hands the power baton in the oil market back to the Saudis and Russians.

A pullback would not be a surprise

From a technical perspective, the crude oil price is stalling below the $54.50 resistance level. Above there, the next level stands at $60 and then at the 2020 $65.65 high. However, the longer nearby NYMEX crude oil futures sit below the $54.50 level, the higher the odds that selloff will hit the oil market and test the $50 level or lower. The fate of the oil market could rest with the stock market. A continuation of the corrective move in equities last week could lead to selling in the oil arena. With stocks still near all-time highs, the odds of a correction remain high.

Surprises are likely to come on the upside

While a crude oil selloff could be on the horizon, I would buy the dip in the energy commodity. Any shocks are likely to come on the upside for four critical reasons, including:

  • Liquidity and stimulus are inflationary, which is bullish for all commodity prices.

  • Iran remains a clear and present danger in the Middle East. US relations with China are at a low point, and Russia is facing internal turmoil. Crude oil tends to rally during periods when the geopolitical landscape becomes turbulent.

  • Falling US production puts the power of pricing in the hands of OPEC+. The cartel's focus is the highest possible price.

  • As vaccines go into arms worldwide, the economy will slowly return to pre-pandemic demand levels, supporting the price of the energy commodity.

The bottom line is that the path of least resistance for crude oil remains higher. The trend is always your best friend in markets, and since March and early November, crude oil has been in bullish mode. The potential for any surprise seems to be on the upside. Iran has pledged revenge for the murder of its top General and a leading nuclear scientist. I expect lots of volatility in the crude oil arena over the coming months. Any selloff is likely to be a buying opportunity so long as the stock market remains stable.

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The United States Oil Fund (USO) rose $0.49 (+1.39%) in premarket trading Monday. Year-to-date, USO has gained 7.69%, versus a -0.17% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #71 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO February 1, 2021 9:50am

Crude Oil Hits a Speedbump

  • Bullish price action in crude oil since early November

  • The price stops short of a critical technical resistance level

  • Higher prices are likely, but buying dips could reduce stress

  • OPEC will push prices higher as US energy policy shifts to a greener path

  • Buy oil when it looks its worst

Bull markets tend to push prices to levels much higher than market participants think possible. As we learned on April 20, 2020, bear markets do just the opposite. Few experts believed that the energy commodity would ever fall to a negative price, much less negative $40.32 per barrel.

A confluence of events, including the global pandemic, OPEC failing to address evaporating demand immediately, and no storage for landlocked crude oil in Cushing, Oklahoma, pushed the price to an unthinkable level on the downside.

Since late April, crude oil has been on the stairs higher, reaching almost $54 per barrel on the nearby March NYMEX futures on January 13. The rally over the past months has not been in a straight line.

In late October, NYMEX crude oil futures corrected, but the move lower ended on November 2 when the price action reversed. The NYMEX futures put in a bullish reversal on the daily chart on the first trading session of November, on the monthly chart on November 30, and on the quarterly chart on December 31. In January, the price moved above $50 per barrel for the first time since February 2020, but the energy commodity could be running into some trouble as it approaches a critical technical resistance level at the mid-February 2020 peak.

The United States Crude Oil Fund (USO) tracks the price action in a portfolio of actively traded futures contracts on the CME's NYMEX division. Even the most aggressive bull markets have speedbumps, and crude oil could be near another during the first month of 2021.

Bullish price action in crude oil since early November

Over the past week, NYMEX February WTF crude oil futures rolled from February to March.

Source: CQG

The daily chart of the now active month March contract shows that the energy commodity rose from a low of $35 on November 2 to a high of $53.94 on January 13. At around the $52 level at the end of last week, WTI crude oil's trend remains bullish but it threatening to turn lower. Price momentum and relative strength indicators were well above neutral readings, with the slow stochastic in overbought territory. However, both have crossed lower over recent sessions. The total number of open long and short positions rose from around 2.04 to 2.28 million contracts from November 2 through January 24. Increasing open interest as the price of a futures contract moves higher is typically a technical validation of a bullish price trend. Daily historical volatility at just over 31.5% remains elevated as daily trading ranges have been wide.

The price stops short of a critical technical resistance level

Since the late April 2020 low, crude oil's price has made an impressive comeback, rising by over $84 per barrel from the low on the continuous futures contract.

Source: CQG

The weekly chart shows that the price appreciation is stalling near the first level of critical technical resistance at the mid-February 2020 $54.50 high. If oil breaks through that level, the next upside target stands at the early January 2020 peak of $65.65 per barrel.

Higher prices are likely, but buying dips could reduce stress

The trend is always your best friend in markets, and it is higher in crude oil. After the upside price action stalled at just below $44 per barrel in October, the price corrected to a low of $33.64. Memories of the price action in late April likely pushed the energy commodity lower as speculators flocked to the short side during the $10 or over 23% decline. However, the price snapped back and moved to a higher high in under one month. By the end of November 2020, crude oil was above $45 per barrel.

I favor the upside in crude oil because the trend remains higher. However, I would not be surprised to see another correction in the energy commodity as it works its way to higher highs. Buying crude oil on price weakness could be the optimal approach as it improves the odds of success in a bullish trend. If crude oil is heading for a test of the 2020 $65.65 high, buying on price dips will lower the stress of carrying a long position through a correction. There are never any guarantees in the world of commodities but buying on weakness in medium to long-term bull markets typically yields the best results.

OPEC will push prices higher as US energy policy shifts to a greener path

After agreeing to taper the 7.7 million barrel per day production cut by 500,000 barrels per month in January through March, Saudi Arabia surprised the market with a one million barrel per day reduction in output in early January. The Saudi cut allows Russia's production to increase, but the news sent the price of crude oil higher and over the $50 per barrel level on nearby NYMEX futures for the first time since February 2020.

While OPEC+ tinkers with production levels to balance the energy commodity's fundamental equation, the cartel leaders, Saudi Arabia and Russia, also realize that the pricing power will shift back to their hands under the Biden administration.

As US energy policy begins to move down a greener path, it will be easier for OPEC+ to fulfill its mission of providing the highest possible return for its members. The surprise production cut from the Saudis could have been a test of the cartel's increased pricing power. Crude oil moved higher after the cut, which is a passing grade for Saudi Arabia and the Russians.

Buy oil when it looks its worst

Even the most aggressive bull markets suffer sharp corrections. If crude oil is heading higher over the coming months and years, buying during selloffs will offer the optimal path for profits. Therefore, look to buy when the price action looks its worst.

If 2008 through 2011 is a model for crude oil and all commodities, the central bank liquidity and government stimulus will have inflationary ramifications. In 2008, the nearby NYMEX crude oil price fell to a low of $32.48 per barrel. By 2011, the price peaked at nearly $115.

The trend in the oil market remained higher as of the end of last week. Bull markets often experience speedbumps on the way to new highs. Using those periods to hop on the bullish trend could be the best plan for 2021.

Want More Great Investing Ideas? 9 "MUST OWN" Growth Stocks for 2021 How to Outperform the Stock Market? 7 Best ETFs for the NEXT Bull Market 5 WINNING Stocks Chart Patterns
The United States Oil Fund (USO) rose $0.22 (+0.62%) in premarket trading Tuesday. Year-to-date, USO has gained 8.39%, versus a 2.99% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #71 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO January 26, 2021 9:28am

Oil Term Structure Favors Higher Prices

  • Crude oil continues to take the stairs to new highs

  • Term structure tightens- Bonus time for the front-to-back crowd

  • Brent-WTI rises- More gains on the horizon as US production declines

  • Upside targets for crude oil in 2021

A commodity's market structure provides clues about the path of least resistance of the price. I view commodity fundamentals as a jigsaw puzzle with many moving pieces. Term structure and location and quality spreads are puzzle pieces that can form a picture of supply and demand dynamics.

Term structure is the forward curve or the price differentials for delivery at different periods. Contango, or a deferred premium, tends to signal equilibrium or oversupply conditions. Backwardation, or a deferred discount, often points to tight supplies or a fundamental deficit. The crude oil market tends to swing from contango to backwardation during its price cycles.

A location spread is the price differential for delivering a commodity in one area of the world versus another. A quality spread reflects different grades, compositions, or forms, of the same commodity. The price differential between Brent North Sea crude oil and West Texas Intermediate crude oil, the two global pricing benchmarks, is a combination of a location and a quality spread in the petroleum market.

The United States Crude Oil Fund (USO) and the United States Brent Crude Oil Fund (BNO) are ETF products that track the two leading petroleum standards' prices.

Crude oil continues to take the stairs to new highs

Since November 2, crude oil has been on a steep staircase to the upside.

Source: CQG

As the daily chart of February NYMEX futures highlights, the energy commodity rose from a low of $34.50 to its most recent high of $53.93 or 56.3% over the past eleven weeks.

Nearby futures settled last week at $52.36 but ended on a bearish note as the price fell on January 14.

Term structure tightens- Bonus time for the front-to-back crowd

Term structure in the crude oil market flipped from the contango or a forward premium to backwardation or a deferred discount late last year.

Source: CQG

The chart of WTI crude oil for delivery in February 2022 minus February 2021 shows that contango reached a high of $5.15 per barrel in late April 2020. The nearby contracts experienced a far higher level of contango or deferred premium as the May futures contract price fell below zero. The February 2021-February 2022 spread fell into backwardation in late November as the oil price moved higher. At the end of last week, it was trading at a $2.20 per barrel backwardation after reaching a low of $3.33 on January 8 and $3.32 on January 14.

The term structure displays tightness or supply concerns in the crude oil market. The move from contango to backwardation created substantial profits for the front-to-back crowd that bought nearby crude oil futures, took delivery, and stored the energy commodity when the contango reached wide levels in March and April 2020. At the same time, they sold crude oil futures for deferred delivery. The move into a backwardation creates the opportunity to unwind the spread by selling the oil in storage at a premium to the price required to close out the deferred short position.

Meanwhile, concerns that US production will decline under a far stricter regulatory environment under the Biden administration is causing the supply concerns that led to the current backwardation. The spread between the crude oil for delivery in February 2023 compared to February 2021 stood at $3.94 back as of January 15. Supply concerns have shifted the crude oil market's term structure over the past months.

Brent-WTI rises- More gains on the horizon as US production declines

The price differential between Brent North Sea and West Texas Intermediate petroleum, the two benchmarks widened since late September. Brent is a seaborne crude oil that is the pricing benchmark for two-thirds of the world's crude oil produced in Europe, Africa, and the Middle East. WTI is the American crude oil for delivery at a pipeline in Cushing, Oklahoma. WTI is the pricing standard for around one-third of the world's petroleum. The different delivery points make the spread between the two a location spread.

When it comes to quality, Brent has a higher sulfur content than WTI, making it a preferable grade of the energy commodity for processing into distillate fuels like heating oil, diesel, and jet fuels. WTI is lighter and sweeter, making it the oil that is easier to refine into gasoline. The Brent-WTI is a location and a quality spread, but it is more. Since the Middle East can be politically turbulent, the spread also serves as a political risk spread for the energy commodity.

Source: CQG

The weekly chart shows that after reaching a 78 cents premium for Brent in late September, the discount for WTI moved to $2.72 at the end of last week. Over the past years, concerns about Middle East supplies caused the Brent premium to rise.

The recent surprise one million barrel per day production cut from Saudi Arabia pushed the spread to a higher Brent premium. Over the past decade, a rising Brent premium was typically bullish for the price of crude oil. In 2011 as the Arab Spring threatened Mid-East political stability, Brent rose to a $27.64 premium to WTI, and the price of nearby NYMEX crude oil futures rose to over $100 per barrel. Meanwhile, that dynamic could change in the coming months and years.

A dramatic shift in US energy production under the incoming administration could push US output lower, putting upward pressure on the price of WTI compared to Brent. Therefore, the crude oil price could move higher even if Brent moves to a discount to WTI over the coming months. Meanwhile, Iran remains a threat to peace in the Middle East. Any hostilities that impact production, refining, or logistical routes in the area that is home to half the world's oil reserves could put upside pressure on nearby crude oil and the Brent premium over WTI.

Upside targets for crude oil in 2021

The technical targets on the upside stand at the February 2020 high of $54.50 and the January 2020 peak of $65.65 per barrel. The last time NYMEX crude oil futures traded over the $100 level was in 2014. On the way to the century mark, there would be technical resistance at the 2020 highs and $76.90, the peak from 2018.

Crude oil is a volatile commodity that takes the stairs higher during rallied and an elevator shaft to the downside during corrections, as we witnessed in April 2020. The energy commodity was on the staircase at the start of 2020.

The crude oil market could face an almost perfect bullish storm in 2021. Herd immunity to the coronavirus will increase energy demand, and the world continues to depend on fossil fuels. US output is likely to decline as energy policy shifts to a greener path. The value of the US dollar and all fiat currencies are trending lower under the weight of liquidity and stimulus causing the money supply to expand and deficits to rise. Inflationary pressures are building, which is bullish for all commodities, including crude oil.

At the beginning of 2021, two pieces of the crude oil market's structure point to higher prices. The tightening trend in the term structure and a rising Brent premium have been bullish over the past decade. The path of least resistance of crude oil continues to be higher as of January 15. However, the risk of a correction will increase with the price of the energy commodity.

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The United States Oil Fund (USO) was trading at $35.83 per share on Tuesday morning, up $0.49 (+1.39%). Year-to-date, USO has gained 8.54%, versus a 0.96% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #73 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO January 19, 2021 11:03am

Crude Oil Reaches $50, Bullish Trend Confirmed

  • A surprise "gift" from Saudi Arabia on January 5 pushes crude oil through $50

  • The Georgia runoff election result is bullish for crude oil

  • The technical levels to watch for as crude oil continues to take the stairs higher

2020 was a rough year for the crude oil market. As the energy demand plunged during the global financial crisis, the price of NYMEX WTI and ICE Brent North Sea crude oil futures dropped. WTI and Brent are the two pricing benchmarks for petroleum. Approximately one-third of the world's producers and consumers use the WTI price while two-thirds price output and requirements on Brent's price. Nearby WTI futures fell to a record low of negative $40.32 on April 20, 2020, as there was no capacity to store the landlocked oil. WTI had not traded below zero since NYMEX introduced futures in the early 1980s. Brent declined to its lowest price this century when the price hit $16 per barrel in late April. Brent is seaborn crude, allowing for storage on ocean tankers.

Since then, prices have recovered. Brent moved back the $50 per barrel level in December, and WTI reached the half-century mark on January 5. The United States Crude Oil Fund (USO) tracks the price of a portfolio of NYMEX WTI futures. The United States Brent Oil Fund (BNO) follows Brent's price higher and lower.

A surprise "gift" from Saudi Arabia on January 5 pushes crude oil through $50

On January 5, Saudi Arabia shocked the crude oil market. After agreeing to a 500,000 barrel per month tapering the 7.7 million barrel per day production cut starting in January 2021, the Saudi Arabian oil minister announced his country would cut output by one million barrels per day as a "gift" to the other world producers. The move allows Russia to increase its production. Nearby NYMEX crude oil futures moved above the $50 per barrel level for the first time since February 2020 on January 5. After trading to a high of $52.75, the nearby futures settled at $52.24 per barrel.

Source: CQG

The daily chart of February futures shows the rise from $34.50 on November 2 to the most recent high of $52.75 per barrel on January 8, after the Saudis surprised the market with a substantial production cut.

The Georgia runoff election result is bullish for crude oil

The timing of the Saudi's move was fascinating as it came on the day of a pair of runoff elections in Georgia that determined the Senate's balance of power. Democrats favor a cleaner and alternative path towards energy and a shift from fossil fuel production. Republicans have advocated for energy independence through fewer regulations. On January 6, two Democrats defeated incumbent Republicans by razor-thin margins that flipped control of the Senate from Republicans to Democrats. Among many other policy issues, the energy was on the ballot in Georgia on January 6, and climate change advocates won. President-elect Biden's initiatives will now have a far easier path through the legislature.

US energy policy will shift to the left with stricter regulations for extracting hydrocarbons from the earth's crust. The bottom line is that US energy production will decline in the coming years as increased regulation will raise the production cost and impede output. Crude oil output rose to a record high of 13.1 million barrels per day in March 2020. That level is now likely to stand as a high for the foreseeable future.

Meanwhile, vaccines that create herd immunity to the coronavirus are likely to increase energy demand in the coming months. As US production falls under the Biden administration's agenda, the pricing power is likely to shift to OPEC and Russia. Saudi Arabia may have revealed their plans to boost the price of the energy commodity in the coming months. For the oil cartel members and Russia, the mission is the highest possible price for petroleum. Crude oil recovered from the April 2020 low when it fell below zero for the first time. The NYMEX contract reached $30 in May, $40 in June, and $50 per barrel in January. The trend has been higher over the past nine months. At the end of 2020, crude oil put in a bullish pattern on the long-term chart.

Source: CQG

The quarterly chart highlights that crude oil futures put in a bullish reversal in Q4 2020 and has followed through on the upside during the first week of January.

The technical levels to watch for as crude oil continues to take the stairs higher

As the crude oil price continues to appreciate, the path of least resistance remains higher. A falling dollar, the prospects for declining US production now that the government is in lockstep with a greener agenda, and the potential for increased global demand as the coronavirus's threats recede all point to higher prices. Moreover, central bank liquidity and government stimulus are inflationary and extremely bullish for the price of all commodities, including crude oil. The latest move by Saudi Arabia exacerbates the bullish fundamentals.

Source: CQG

The next technical resistance level stands at the mid-February 2020 $54.50 high. Above there, the early January 2020 peak of $65.65 is the next upside target. In 2018, NYMEX futures hit a high of $76.90, and the last time crude oil was above $100 per barrel was in mid-2014. Support stands at $33.64, the early November low.

Crude oil tends to take the stairs higher and an elevator shaft to the downside during corrections, as we witnessed in early 2020. At the start of 2021, the energy commodity is on the staircase, and higher prices look like the path of least resistance.

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The United States Oil Fund (USO) rose $0.48 (+1.36%) in premarket trading Tuesday. Year-to-date, USO has gained 8.03%, versus a 1.28% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO January 12, 2021 9:44am

Gold Confirms Bullish Trend

It's been a busy past month for major asset classes, and while Q4 was mostly a quarter to forget, both gold (GLD) and silver (SLV) managed to finish the year strong.

This was a significant positive development because gold had a pivot of $1,700/oz to confirm its yearly breakout, and this level was briefly under pressure during the depths of the correction during Q4. Fortunately, the close well above this pivot level has further increased the probability that we are in a new bull market, and the first all-time high in a new bull market is rarely the last. This suggests that we are likely still in the early innings of a new precious metals bull market, and this will remain the case as long as gold remains above $1,700/oz on a yearly closing basis. Let's take a closer look below:

Chart, histogram Description automatically generated

(Source: TC2000.com)

As shown in the chart above, the yellow metal has gone nowhere for nearly a decade following a gruesome bear market in 2012 through 2015, which nearly cut the metal in half.

However, we finally saw a range expansion, which was confirmed with the yearly close above $1,700/oz in 2020, translating to a new all-time high yearly close for the metal. Many critics seem to have jumped in the bear camp for gold, and continue to point out that gold miners (GDX) are terrible investments simply due to past biases and more than a decade of poor returns. However, the same was said about many asset classes in the past, and every asset class has its decade of under-performance.

The great thing about these 'lost' decades is that they grind down bullish sentiment to a pulp so that when new highs finally do show up, most of the public isn't interested. Let's look at a few examples below:

Chart, histogram Description automatically generated

(Source: TC2000.com)

As shown in the chart above, the S&P-500 (SPY) had a lost decade between 2001 and 2012, with the market going nowhere and suffering two major secular bull markets. When the market finally broke out in 2013, many had proclaimed that this was simply a triple-top and a test of a major resistance level, and this was the wrong time to be piling into the market.

However, as the chart shows above, this was actually the top of the 1st inning of a new secular bull market, which would see the SPX gain 100% over the next six years. While this might not seem like much, this 100% return for the S&P-500 translated to a more than 1000% return for several leading stocks in the same period.

Chart, line chart Description automatically generated

(Source: TC2000.com)

We heard similar arguments in 2012 for the Russell 2000 (IWM), with the index being one of the hardest-hit indexes during the 2007-2009 bear market, plunging 60% from its highs. However, the all-time high in late 2012 was a very bullish signal for the index, suggesting that the landscape was finally changing, and discussions of how poor the historical 10-year return was at the time were irrelevant.

It's important to note that while these arguments for poor long-term performance do hold weight until an index proves itself and makes a new all-time high, they hold zero weight once that new all-time high is made and confirmed by a yearly close. This is because there is clearly a positive change in the fundamentals to bring on this new all-time high. This typically shows up in price action first, with the smart money looking forward to either a brighter economy or a brighter fundamental outlook.

Chart, histogram Description automatically generated

(Source: TC2000.com)

Three years ago, it was difficult to get anyone to discuss clean energy positively, and many were still on the oil bandwagon (USO) despite a devastating bear market in 2014 through 2016. However, the Cleantech Portfolio ETF (PBW) broke to new all-time highs after doing nothing since its inception and rose an incredible 100% in less than three years. This all-time high was signaling a positive change in the fundamentals and the fact that it was time to be open-minded to beginning to start positions in this area.

Chart, histogram Description automatically generated

(Source: TC2000.com)

The last example worth noting is palladium (PALL), gold's more expensive cousin, that broke out of a massive decade-long base in 2017. As shown above, the metals tend to see super-charged returns when they break out of these massive bases, and the Palladium ETF was no exception.

In fact, the metal soared 250% in less than three years from its breakout, and the worst possible thing to do at this all-time high was to be skittish or bearish. Just because an asset class has had a difficult time with a level in the past or has a poor 10-year return is zero reasons to be negative on it. Still, many generalist investors continue to poo-poo gold due to recency bias.

Graphical user interface, chart Description automatically generated with medium confidence

(Source: Daily Sentiment Index Data, Author's Chart)

As should be clear from the above examples, all-time highs from near decade-long consolidations are very bullish, and gold's breakout last year achieved precisely this feat. The fact that bullish sentiment remains at barely 50% despite this massive breakout is a gift for investors because it suggests that only a small group of investors are actually bullish on the metal.

While sentiment did soar to 90% bulls in August when the trade was crowded, the 15% correction in the metal has wiped out much of this bullish sentiment. Meanwhile, given that gold is less than 10% above its previous all-time high, and all the above examples achieved a 100% return within six years, we can confirm that gold likely has quite a bit of gas left in its tank long-term.

Obviously, there's no guarantee that gold performs similarly to the examples above, with the average return from the all-time high breakout over the first three years being above 75%. Even if we are conservative and cut the average return within three years from the breakout in half, we come up with an average return of 37% between now and August 2023.

This would translate to a gold price near $2,650/oz, and margins for major gold miners above 60% based on average all-in sustaining costs of $1,000/oz. This would translate to a 200 basis-point improvement from current levels, with most mining companies currently working with average margins of 40%. Therefore, there's a case to be made for both miners and gold in a portfolio with the new all-time high breakout recently confirmed.

While it's never that easy to buy all-time highs, the above charts should provide comfort that all-time highs are actually quite bullish, with assets rarely re-entering their base after multi-year breakouts. Given the recent breakout through $1,900/oz, the initial price target for this breakout is $2,350/oz, with a potential for $2,700/oz by 2023 if the $2,350/oz target is met. Based on this enormous upside based on conservative technical targets, I remain bullish for gold even after last year's sharp increase. I believe that this is similar to the rare opportunity the S&P-500 offered in 2013 to get long at a major breakout area.

Given the metal's long-term bullish outlook, I would view any pullbacks below $1,850/oz as opportunities to add to one's position, and I continue to see a case for accumulating best in breed gold miners like Kirkland Lake Gold (KL) and Newmont (NEM).

Disclosure: I am long GLD, NEM, KL

 Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas? 9 "MUST OWN" Growth Stocks for 2021 Should Investors Beware January 6? 7 Best ETFs for the Next Bull Market
The SPDR Gold Shares (GLD) was trading at $179.49 per share on Thursday afternoon, down $0.41 (-0.23%). Year-to-date, GLD has gained 0.63%, versus a 1.27% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #10 of 35 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD January 7, 2021 1:35pm

Exciting 2021 On The Horizon for Crude Oil

  • An over $100 trading range in nearby NYMEX futures in 2020

  • Lots of price action ahead in 2021

  • The US and global politics could light a bullish fuse

  • The financial landscape is bullish for crude oil, but it could be another wild ride

2020 was anything but a dull year in the crude oil markets. The year began with prices reaching the peak in early January when the US and Iran faced off in Iraq after the killing of a high-profile Iranian military commander. Energy demand evaporated as the global pandemic closed down broad parts of the worldwide economy in February through April, sending the price of NYMEX crude oil futures into negative territory for the first time in history. Brent futures fell to the lowest level of this century.

Like the stock market, crude oil tends to take the stairs higher and an elevator shaft to the downside during corrections and bear markets. The price of nearby WTI NYMEX and Brent ICE futures are heading into 2021 on either side of $50 per barrel. While the price range in 2020 will be a challenge to replicate, the energy commodity is likely to experience lots of volatility in 2021.

The United States Crude Oil Fund (USO) replicates the price action of a portfolio of NYMEX WTI futures. The United States Brent Crude Oil Fund (BNO) tracks the price action in a portfolio of ICE Brent futures.

An over $100 trading range in nearby NYMEX futures in 2020

The crude oil futures market mirrored the pulse of markets in 2020. During the first week of trading in January 2020, the price of nearby NYMEX futures rose to the highs of 2020 at $65.65. The faceoff between the US and Iran in Iraq after the killing of a top Iranian military commander ignited supply concerns that sent the price of crude oil to a peak. As the confrontation did not accelerate, the price settled back, causing crude oil to make lower highs and lower highs through mid-February when the bottom fell out of the market. On April 20, a crescendo of selling sent the energy commodity below zero and a record low.

Source: CQG

The weekly chart highlights the $105.97 trading range in NYMEX WTI crude oil futures in 2020. The energy commodity fell to a low of negative $40.32 per barrel on April 20. WTI is a landlocked crude oil with a delivery location at a pipeline in Cushing, Oklahoma. At the beginning of the global pandemic, demand evaporation caused those holding long positions in the expiring May futures contract with no options to store the energy commodity. Therefore, the nearby contract became a bearish hot potato with longs selling at any price as taking delivery was not possible. Margin calls as the price dropped caused force liquidations of futures positions.

Since the low, crude oil has taken the stairs higher, with a few speedbumps along the way. The price settled at the $48.52 per barrel level on December 31, 2020, $88.84 above the year's low and $17.13 under the 2020 peak.

As we head into 2021, the total number of open long and short positions in the NYMEX futures arena was at the 2.155 million contract level. At the end of 2019, the metric was only a little lower at 2.146 million.

Weekly price momentum and relative strength indicators were well over neutral readings with momentum in overbought territory. The metrics were in the same position as at the end of 2019 on the final trading session of 2020. Weekly historical volatility at 37.8% on December 31, 2020, was higher than at the end of the previous year when it was around the 20% level.

Lots of price action ahead in 2021

Like many commodities, crude oil tends to take the stairs higher and an elevator shaft lower during bear market corrections. Rallies can take months; violent corrections often occur in the blink of an eye, as we witnessed in Aril 2020. We are moving into 2021 on a staircase higher threatening to challenge the $50 level on the nearby NYMEX futures contract.

In 2020, the unforeseen event, a global pandemic, caused the demand to evaporate, leading to the most substantial price volatility in history for the energy commodity. Any significant moves in 2021 will likely come from an event that hits the market out of the blue. The unknown always tends to ignite the most substantial price variance in crude oil and markets across all asset classes.

Meanwhile, the landscape of "knowns" going into 2021 is mostly bullish for the price of the energy commodity.

The US and global politics could light a bullish fuse

Politics in the US and worldwide look to be a supportive factor for the oil market in the new year. In the US, the incoming Biden administration has pledged to increase alternative and renewable energy sources and decrease fossil fuel output.

The January 5 runoff Senate elections will determine the Senate's balance of power and the extent of the US energy policy shift. However, the Biden administration will rejoin the Paris climate accord, increase regulations on energy producers, limit fracking and other extraction techniques, and push production costs higher. US crude oil output reached a record 13.1 million barrels per day in March 2020.

The upcoming shift in energy policy will cause production to decline. The March 2020 peak in output will stand as a record for the foreseeable future. OPEC+ will continue to taper their production cuts as the worldwide economy improves. However, the decline in US output will cause the cartel to do its utmost to achieve the highest price for its members. A move away from hydrocarbon production in the US will hand pricing power back to OPEC, the cartel controlled by Russia and Saudi Arabia.

While the Biden administration will support moves to reestablish the Iran nuclear nonproliferation agreements, it could be a goal that is too far to reach. The assassination of Iran's top nuclear scientist has increased tensions.

Moreover, the recent warming of relations between Israel and many Arab nations is an affront to the Iranian theocracy. Iran and Saudi Arabia remain mortal enemies. Any hostilities that impact production, refining, or logistical routes in the Middle East could cause sudden rallies. While crude oil tends to take the elevator to the downside, events that threaten Middle East supplies can drive the elevator to move higher. The Middle East remains home to more than half the world's crude oil supplies.

The US and geopolitical landscape for crude oil are mostly bullish going into 2021.

The financial landscape is bullish for crude oil, but it could be another wild ride

There may be nothing more bullish for all commodity prices than the financial landscape going into the new year. If the period from 2008 through 2011 is a model for 2020 and the coming years, explosive rallies in commodity markets could be on the horizon. Following the 2008 global financial crisis, central banks and governments unleashed unprecedented liquidity, pushed interest rates to historic lows, and stimulated economies via bailouts and other fiscal policy tools.

While the 2020 pandemic was a far different crisis than in 2008, the central banks and governments used the same tools to encourage spending and borrowing and inhibit saving. The only difference is that the amount of monetary and fiscal stimulus in 2020 was far higher than in 2008. As an example, the US Treasury borrowed a record $530 trillion from June through September 2008. In May 2020, it borrowed $3 trillion. The latest stimulus program promises more borrowing in 2021.

The price tag for the tidal wave of liquidity and tsunami of stimulus is inflation. The increase in deficits and the money supply is fertile ground for inflationary pressures, which push commodity prices higher. After the 2008 financial crisis, commodity prices rose to multi-year or all-time highs by 2011 and 2012. With the level of monetary and fiscal programs higher in 2020, why should we expect any different market response over the coming years?

Many signs point higher for the crude oil market in 2021. However, as we have learned over the past years, the unknown can move the price the most. Bull markets rarely move in a straight line. I would be a buyer of crude oil on price weakness but will have my eyes open for those unexpected events that can change the landscape for the path of least resistance of prices. If 2020 taught us anything, it is always to expect the unexpected in markets.

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The United States Oil Fund (USO) was trading at $33.25 per share on Monday morning, up $0.24 (+0.73%). Year-to-date, USO has gained 0.73%, versus a 0.11% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #70 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO January 4, 2021 10:15am

Shifting Dynamics Should Lead to Gains in 2021 for Crude Oil

  • Shifting energy dynamics

  • Crude oil is still the king of the energy sector

  • Bullish short-term- Politics will create volatility in 2021

Many markets tend to take the stairs higher and an elevator lower. In the stock market, the reason the VIX index often rallies during corrective periods. The VIX reflects the prices of put and call options on the S&P 500 stocks. Market participants tend to buy options, or price insurance, when the market is falling, forcing the VIX higher. The stock market is one example of this phenomenon, and the world's most liquid commodity, crude oil, is another.

At the beginning of last week, we witnessed another example of how crude oil takes the elevator to the downside during price corrections. The price had been on the staircase to the upside since reaching a low of $33.64 per barrel on the nearby NYMEX futures contract on November 2. The price moved to a high of over $49 on Friday, December 18.

On December 21, the energy commodity got back on the elevator and fell below the $47 level after January NYMEX futures rolled to February. The winter months tend to be a seasonally weak period for crude oil. As we move into 2021, we should continue to expect volatility in the crude oil futures arena. While the world looks to move away from fossil fuels, petroleum will still provide energy for the coming years.

A shift in dynamics may only exacerbate the price volatility in the coming year. The United States Oil Fund (USO) tracks the NYMEX crude oil futures' price higher and lower.

Shifting energy dynamics

On January 20, 2021, Joe Biden will become the forty-sixth President of the United States. President-elect Biden pledged to address climate change during the campaign. His administration will rejoin the Paris climate accords. US energy policy will shift from the drill-baby-drill and frack-baby-frack environment under President Trump to a far stricter regulatory atmosphere over the coming years. Progressive Democrats are likely to push the incoming President towards policies that would cause US crude oil and natural gas output to decline. Rising costs and limits or even bans on fracking will cause production to fall.

Over the past years, US crude oil production surpassed Russian and Saudi Arabian output as it rose to a record 13.1 million barrels per day in March 2020. We are likely to see that record stand for a long time given the US energy policy shift under the Biden administration. The extent of the change depends on the upcoming January 5 runoff elections in Georgia that will determine the Senate's balance of power.

A victory by Democrats would create clear sailing for the incoming President's initiatives. If Republicans maintain control of the Senate, the administration will need to compromise, limiting the energy policy change. In either case, some of the pricing power in the crude oil market will revert to OPEC+, handing Russia and Saudi Arabia more influence over the future path of petroleum prices. Since the leading producers have a vested interest in higher prices, we should expect them to follow production policies that encourage rising oil prices.

Crude oil is still the king of the energy sector

While the Biden administration will encourage less oil production and consumption, crude oil remains a critical energy source for cars, planes, trucks, ocean vessels, heating, and other requirements that power the US and countries worldwide.

It will take years, if not decades, to shift to alternative energy sources and abandon fossil fuels. China and India, the world's most populous nations, with over one-third of the world's people, continue to consume crude oil. A shift in US energy policy will not materially impact the fundamental equation's demand side in the near-term. Still, it will affect the supply side if production drops significantly.

The US briefly became the crude oil king during the Trump administration, but the crown looks likely to pass to Russia and Saudi Arabia, given the shift in energy policy under the incoming administration. As the global population continues to rise, the energy demand will move higher. We could see higher oil prices over the coming years, and crude oil is heading into 2021 in a bullish trend.

Bullish short-term- Politics will create volatility in 2021

The move to a negative price for crude oil in late April was an outlier, created by the global pandemic.

Source: CQG

Since then, we have seen the oil futures market make higher lows and higher highs. The most recent peak came on December 18 when the nearby February NYMEX futures contract reached a high of $49.43 per barrel. The February Brent contract reached a peak of $52.47.

Crude oil tends to take the stairs higher and an elevator lower. Another elevator ride is always possible, but the trend remained higher as of December 24.

The crude oil futures market put in a bullish reversal on the monthly chart in November. The price traded below the October low and closed November above the previous month's high.

Source: CQG

A close above $43.78 on the nearby NYMEX futures contract on December 31 would create a bullish reversal on the quarterly chart going into 2021. Expect lots of volatility in the oil market during the coming year. A shift in US energy policy, a falling dollar, and rising inflation because of monetary and fiscal policies could turn out to be a potent bullish cocktail for the energy commodity that continues to power the world for the coming year. Brewing tensions with Iran is another factor that could lift the price of the energy commodity in 2021 just as it did in early 2020.

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The United States Oil Fund (USO) rose $0.18 (+0.55%) in premarket trading Monday. Year-to-date, USO has declined -67.80%, versus a 17.67% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #69 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO December 28, 2020 9:26am

Crude Oil Facing Short-Term Headwinds

  • Crude oil rises to its highest price since early March

  • Resistance at the half-century mark in NYMEX crude oil futures

  • Inventory data is not bullish- Tightness in the forward curve

  • An end to the pandemic is bullish, and so is the path of US energy policy

As of the end of last week, the continuous NYMEX WTI crude oil contract continued to rise from the ashes as it recovered by nearly $90 per barrel after falling far below zero on April 20, 2020. The seaborne Brent North Sea crude oil futures on the Intercontinental Exchange rose by over $36 per barrel on its continuous futures contract.

The landlocked NYMEX futures fell to lows as there was nowhere to store the energy commodity as the May contract expired. Anyone holding futures contracts on April 20 without access to storage and the ability to take delivery in Cushing, Oklahoma, was forced to sell at any price. The drop in Brent caused panic among oil-producing nations worldwide, including OPEC members and Russia, as energy demand evaporated during the pandemic's spread.

After months of a substantial price recovery, the crude oil market could face some headwinds as the prices are reaching the half-century mark, and we move towards 2021. Bullish and bearish factors pull the crude oil price in opposite directions as it continues to take the stairs to the upside. The United States Crude Oil Fund (USO) and the United States Brent Crude Oil Fund (BNO) follow the prices of the crude oil benchmarks that trade on the NYMEX and Intercontinental Exchange.

Crude oil rises to its highest price since early March

The elevator ride from over $40 per barrel in late October to a low of below $34 on the continuous NYMEX crude oil contract on November 2 turned out to be a false breakdown. Throughout November and December, crude oil got back on the staircase to the upside.

Source: CQG

As the weekly chart highlights, the oil price rallied over the past seven consecutive weeks, reaching a high of $49.28 per barrel last week, the highest level since the final week of February.

Resistance at the half-century mark in NYMEX crude oil futures

Nearby NYMEX crude oil futures could run into some congestion and technical resistance at the $50 per barrel level. The last time the price of the energy commodity was north of the half-century market was ten months ago. Meanwhile, Brent futures are already above $52 per barrel.

Source: Barchart

As the chart illustrates, the nearby February Brent crude oil contract closed last week at $52.26 per barrel level.

Inventory data is not bullish- Tightness in the forward curve

Inventory data from the American Petroleum Institute and Energy Information Administration has not been very bullish for the crude oil market. The ongoing COVID-19 pandemic continues to weigh on the demand for the energy commodity.

Since the week ending on October 2, the API and EIA reported inventory builds of 2.768 million and 7.70 million barrels of crude oil, respectively, as of the week ending on December 11. Gasoline stocks rose by 9.631 and 10.70 million barrels. Both reported declines in distillate stocks of between 21.5 and 21.90 million barrels over the period. The data suggest that the petroleum and oil product markets continue to suffer from demand concerns considering declines in production in the US and from OPEC+.

Meanwhile, tightness in the spread between NYMEX crude oil for delivery in February 2021 and February 2022 is a sign of rising supply concerns.

Source: CQG

The chart of NYMEX crude oil for delivery in February 2022 minus February 2021 shows the market's term structure moved from a $3.11 contango in early November to a $1.34 backwardation at the end of last week. The shift in the forward curve as the price of crude oil appreciated over the past weeks signifies nearby tightness for the energy commodity. Brent crude oil futures for the same period were also trading at a $1.19 backwardation for the same period.

Aside from the rising price, the tightness could be coming from concerns over the recent assassination of Iran's top nuclear scientist. The Middle East is home to half the world's crude oil reserves. Political turbulence in the region tends to cause supply concerns to rise.

An end to the pandemic is bullish, and so is the path of US energy policy

The demand for energy is likely to increase in the aftermath of the COVID-19 pandemic. Meanwhile, increased regulations and a shift to a greener US energy policy could cause a decline in US output under the incoming Biden administration. US output reached a record 13.1 million barrels per day in March. We are not likely to see that level given the change in administrations on January 20, 2021.

Crude oil continues to take the stairs to the upside after falling to a bottom in early November. While there are some headwinds for the oil futures market, the path of least resistance remained higher at the end of last week. Expect lots of volatility in crude oil in 2021 as the energy commodity continues to provide power to the world.

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The United States Oil Fund (USO) was trading at $32.05 per share on Monday morning, down $1.43 (-4.27%). Year-to-date, USO has declined -68.73%, versus a 14.97% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #70 of 113 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO December 21, 2020 9:50am

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