- A recovery ends and a return to below the $50 level
- Coronavirus and US politics causes a period of risk-off across all markets
- The Saudis will attempt to push Russia into more production cuts
The price of nearby NYMEX crude oil futures traded to a low of $49.31 during the week of February 3. The first probe below the $50 level led to a recovery that took the energy commodity to a high of $54.50 per barrel in mid-February, where it ran out of steam on the upside.
Crude oil was one of many victims of Coronavirus that caused fear and uncertainty to rise across all asset classes over the past week. At the same time, as the US moves towards the 2020 Presidential election, the leading candidate from the opposition party advocates for significant shifts in US policy, which would impact the US leadership role in energy production.
Crude oil experienced what was a “dead cat bounce” as selling returned to the market and pushed the price of the energy commodity below $50 to a new and lower low last week. The United States Crude Oil ETF product (USO) moves higher and lower with the price of nearby NYMEX futures.
A recovery ends and a return to below the $50 level
The final week of February 2020 will go down as one of the worst weeks for markets across all asset classes in history. Stocks plunged, bonds rallied in a flight to quality, and commodities price cascaded lower. Crude oil was no exception as the price fell to its lowest level since late 2018.
The weekly chart highlights the decline from a high of $54.50 on February 20 to a low of $43.85 during the final trading session of February. The price of nearby April futures settled at $44.76 per barrel on February 28. Price momentum and relative strength indicators fell into oversold territory. Open interest, the total number of open long and short positions in the NYMEX futures market moved higher from 2.11 million contracts on February 20, the day that the price reached its peak, to 2.21 million at the end of last week. In a futures market, rising open interest and falling prices tend to be a technical validation of a bearish trend. The elevator ride to the downside lifted weekly historical volatility from just over 25% on February 20 to over 37% at the end of last week.
Coronavirus and US politics causes a period of risk-off across all markets
The news is telling market participants that the spread of Coronavirus around the world created the price carnage in crude oil, stocks, and a host of other markets last week. On Monday, February 24, reports of cases in South Korea, Iran, and Italy ignited the market implosion according to most pundits. However, what most are not citing as another reason that likely contributed to and exacerbated the waves of selling was the result of the Nevada caucus on Saturday, February 22.
Vermont Senator Bernie Sanders won an overwhelming victory in my home state of Nevada vaulting him to the leadership position in the race to capture the nomination to challenge President Trump in November. The Senator is a self-proclaimed Democratic Socialist who advocates for sweeping changes in US policy when it comes to taxes, the environment, and many other policy areas. A shift from the current capitalist system in the US to an embrace of socialist initiatives would have a dramatic impact on markets that reflect the economic and political landscapes.
Last weekend, South Carolina held its primary. Former Vice President Joe Biden, a moderate Democrat, held a commanding lead in the polls going into the contest. However, March 3 is Super Tuesday with a slew of delegates up for grabs. If Senator Sanders puts more distance between himself and challengers, the odds of his capturing his party’s nomination will rise. A continuation of the risk-off environment could depend on a combination of the progress of the virus and the results of the Super Tuesday contests. At the same time, the US Fed appeared ready to step in with emergency stimulus in the form of interest rate cuts at the end of last week.
The Saudis will attempt to push Russia into more production cuts
With crude oil at its lowest level since late 2018, OPEC, together with the Russians, is likely to cut production further over the coming days. At its late 2019 meeting, the cartel increased its production cut from 1.2 to 1.7 million barrels per day. At the same time, Saudi Arabia added another 400,000 barrels, bringing the total reduction to around the 2.1 million barrel per day level. OPEC will meet to discuss the impact of the cuts at the beginning of this month.
The ministers of the cartel had told markets that the desired range for Brent crude oil is between $60 and $70 per barrel. With May Brent futures settling at $49.67 on February 28, the price of the energy commodity is over $10 below the bottom end of OPEC’s target range. The cartel is likely to act to reduce output further to balance the supply and demand fundamentals of the crude oil market. Additionally, at the current low price, US output could fall from its record 13 million barrel per day level.
Technical support for nearby NYMEX crude oil futures stands at $42.36 per barrel, the low from December 2018. Below there, the next level of support is nearby at the June 2017 low of $42.05. However, in February 2016, the price of the energy commodity plunged to the $26.05 level, which is the critical level of technical support.
I will be watching OPEC, the primary results, the Fed, and Coronavirus for clues on the path of least resistance for the price of oil and most other markets over the coming sessions.
The United States Oil Fund LP (USO) was trading at $9.92 per share on Tuesday morning, down $0.00 (0.00%). Year-to-date, USO has declined -17.40%, versus a 16.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andrew 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.