Crude Oil Crawling Higher

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August 24, 2020 9:47am NYSE:USO

NYSE:USO | News, Ratings, and Charts
  • An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

  • Inventory and production data remain bullish

  • Balancing the equation to allow for a continuation of the bullish crawl

Over the past weeks, some of the leading industrial commodities have been sending a signal to the crude oil market.

The price of lumber rose to a new all-time high at $830.90 on August 21. Before the most recent rally, wood futures peaked at $659 per 1,000 board feet in May 2018.

Last week, copper futures on COMEX probed above $3 per pound for the first time since June 2018. The demand for wood and copper that lifted the price is a function of some supply disruptions and the US dollar’s falling value against other currencies.

The dollar is the pricing mechanism for most commodities, and a weakening greenback often has a bullish impact on raw material prices.

Copper and lumber are industrial commodities, and so is crude oil.

The energy commodity hit a low, along with lumber and copper, in March when the global pandemic caused risk-off conditions in markets across all asset classes.

Since then, the prices of WTI and Brent crude oil futures that trade on the NYMEX and ICE have been crawling higher.

The price action in the base metal and wood markets could be a sign that crude oil is heading for the $50 per barrel level sooner rather than later. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) track the prices of the two benchmark petroleum futures markets higher and lower.

An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

The price of nearby NYMEX crude oil traded to a high of $65.65 per barrel in early January. In late April, it was $105.97 lower at the negative $40.32 level.

The wide contango or forward premium caused the September contract to fall to $21.99, and October futures reached a bottom at $23.25. Over the past week, September futures on NYMEX rolled to October.

Source: CQG

The new active month October contract shows that the peak on August 5 was at $43.68 per barrel, and the price was trading at just below that level. After taking an elevator shaft to the downside earlier this year, the price has made higher lows and higher highs.

Price momentum and relative strength indicators were above neutral readings at the end of last week.

The total number of open long and short positions in the NYMEX crude oil market has been stable at the two-million-contract level.

Daily historical volatility at 17.5% declined from a high of almost 155% in March. The daily price ranges have narrowed dramatically over the past months as crude oil has been on a staircase to the upside.

Inventory and production data remain bullish

Last week, the inventory data from the API and EIA remained upbeat with the fourth consecutive week of declines in crude oil inventories.

The API reported a decline of 4.264 million barrels for the week ending on August 14. While gasoline stocks rose by 4.991 million barrels, distillates fell by 964,000 barrels. The EIA said that crude oil inventories fell by 1.60 million barrels with a decline of 3.3 million barrels in gasoline stocks.

Distillate only rose by 200,000 barrels. The inventory data was a sign of demand for the energy commodity. Meanwhile, at 10.7 million barrels per day, US production was 18.3% below the peak output level in March.

When it comes to OPEC, Russia, and other leading world producers, the group tapered its production cut from 9.7 million barrels per day in July to 7.7 mbpd in August.

At the most recent meeting, the group concentrated on compliance with the production quotas and did not change the level for the coming month. OPEC and Russia continued to express concern about demand, saying, “the pace of recovery appeared to be slower than anticipated.”

Balancing the equation to allow for a continuation of the bullish crawl

Inventory and production data have balanced the fundamental equation for crude oil with the price above the $40 per barrel level. The fundamental and technical position of the crude oil market continues to support the slow and steady crawl to the upside.

Meanwhile, a falling dollar, interest rates at historic lows, and government and central bank stimulus combine to create a potent bullish cocktail for commodity prices. Copper rose to its highest price in over two years last week.

Lumber reached an all-time peak and traded at over $830 per 1,000 board feet over recent sessions. In May 2018, the price of wood reached a record high at $659. Before that, the record level was at $493.50 in 1993. Gold recently moved to a new all-time peak.

The price of crude oil continues to edge slowly higher. The price action in many other commodities could be telling us that higher oil prices are on the horizon.

Resistance on October futures is at $43.68 and at $54.50 on the continuous contract. Support stands at $39 and $38.72. Risk-reward continues to favor the upside in crude oil. However, any sudden decline in the US stock market could change the current path of least resistance for the energy commodity.

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The U.S. Oil Fund LP (USO) rose $0.18 (+0.60%) in premarket trading Monday. Year-to-date, USO has declined -70.34%, versus a 7.44% 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 111 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…

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