Crude Oil: Lots Of Volatility As Inventories Continue To Decline

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August 6, 2019 11:12am NYSE:USO

NYSE:USO | News, Ratings, and Charts

From Andrew Hecht

  • Crude oil failed at a lower high
  • Inventories support gains
  • The “sweet spot” for crude oil is $60 to $70 on Brent

Bullish and bearish factors continue to pull the price of crude oil in opposite directions. Last week, the price of nearby September NYMEX futures made it up to a high at just under $59 per barrel. The active month October Brent futures rose to almost $65.50. On Thursday, August 1, the prices of both benchmark crude oil futures came crashing down, but they recovered on the final session of the week.

Crude oil is an industrial commodity, and demand for the energy commodity is a function of global economic growth. A new high in the US dollar weighed on the price of crude oil. Moreover, news that the US slapped a 10% tariff on $300 billion in Chinese exports to the United States caused demand concerns to increase. However, the seventh consecutive week of inventory declines likely prevented a more substantial move to the downside.

The United States Oil Fund, LP (USO) is the ETF product that reflects price action in the NYMEX WTI futures market. The United States Brent Oil Fund, LP (BNO) tracks the price of Brent crude oil that trades on the Intercontinental Exchange. Consumers and producers around the world use either WTI or Brent to price requirements or output.

Crude oil failed at a lower high

Since late April, the price of NYMEX WTI and Brent crude oil futures have been making lower highs.  

Source: CQG

The daily chart highlights that the most recent lower peak came on July 31 when the price of September NYMEX futures rose to $58.82 per barrel. The following day, the price experienced its most significant downdraft in four years when it fell by over $5 to a low at $53.59 on August 1.

The news that President Trump decided to slap additional tariffs on China weighed on the price of oil, but it had been on its way lower before the news broke. China is a significant factor when it comes to worldwide energy demand. The escalation of the trade dispute is likely to cause a further slowdown in economic growth in the nation with the second-largest GDP.

Inventories support gains

Meanwhile, the high on July 31 came after the latest inventory data from the Energy Information Administration and the American Petroleum Institute. As of the close of business on July 26, both the EIA and API reported the seventh consecutive week of stockpiles declines. On July 30, the API said that oil stocks fell by a more than expected 6.024 million barrels. On July 31, the EIA noted they dropped even more, by 8.5 million barrels. At the same time, each reported declines in oil product stocks as of July 26.

The inventory data was not bearish for the price of crude oil. Stocks likely helped the price recover from the low on Friday, August 2 as nearby NYMEX futures settled at $55.66 per barrel and October Brent futures were at the $61.89 level.

The “sweet spot” for crude oil is $60 to $70 on Brent

Two-thirds of the world price production and consumption off of the Brent benchmark. Brent is the pricing mechanism for oil coming from Europe, Africa, and the Middle East.

Source: Barchart

As the chart shows, the price of nearby October Brent futures dropped from $65.43 on July 31 to a low at $60.03 at the low and settled the week at just under the $62 per barrel level.

Before the most recent biannual meeting of the international oil cartel in early July, the oil ministers agreed that the sweet spot for the price of Brent crude oil is between $60-$70 per barrel. OPEC member Equatorial Guinea’s oil minister Gabriel Mbaga Obiang Lima told S&P Global Platts, “$60-$70 per barrel is the price that we all feel comfortable with.” The price of Brent futures stopped falling at just three cents over the bottom end of OPEC’s price range at last week’s low.

The price action in the crude oil market was bearish over the past week. Inventories, Iran, and OPEC’s desired price floor all stand as reasons that buying dips in the crude oil market could be the optimal strategy.

The United States Oil Fund LP (USO) was trading at $11.35 per share on Tuesday morning, down $0.02 (-0.18%). Year-to-date, USO has declined -5.50%, versus a 7.36% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 109 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of

About the Author: Andrew Hecht

andrew-hechtAndrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

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