Crude Oil Works Towards the Bottom End of its Trading Range

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January 28, 2020 6:58am NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • Crude oil has been trading in a $50-$66.60 trading range since early 2019
  • 2020 began with a move to the top end of the band
  • A test of the bottom is on the horizon which could be a buying opportunity for three reasons

 

The last time the price of nearby NYMEX crude oil futures traded below the $51 per barrel level was in early October 2019. The price of nearby futures hit a low of $50.99 on the continuous futures contract before taking the stairs to the upside for just over three months.

While environmental concerns are likely to replace crude oil with alternative energy sources in the coming years, the fossil fuel continues to be the commodity that powers the world today. The price of oil is trading at far lower levels than in 2008. Twelve years ago, NYMEX futures reached a peak of $147.27 per barrel. The last time oil traded at over the $100 level was in 2014. However, crude oil is still trading at far higher levels than in past years these days. Before 2004, the highest price NYMEX futures ever reached was $41.14 per barrel.

We are likely to see the price of oil return to the bottom end of its recent trading range at the $50 level over the coming weeks. Meanwhile, a move to around that price could create a buying opportunity for three compelling reasons. The United States Crude Oil Fund (USO) is an ETF product that follows the price of the WTI futures higher and lower.

Crude oil has been trading in a $50-$66.60 trading range since early 2019

The current selloff in the crude oil futures market is the third time the energy commodity took an elevator to the downside since April 2019.

(Source: CQG)

The weekly chart highlights that the price of nearby NYMEX crude oil futures fell from the 2019 of $66.60 in mid-April to a low of $50.60 in early June. The energy commodity than peaked at a lower high of $63.38 in mid-September when a drone attack on Saudi oilfields temporarily knocked out 6% of the world’s oil supplies. The price then declined to a low of $50.99 in early October.

The current selloff has taken oil from a high that was only 95 cents below the 2019 peak on January 8 after hostilities between the US and Iran reached a boiling point in Iraq. As of last Friday, the price had declined to a low of $53.85 per barrel, and it settled just above there at the $54.19 level. Price momentum and relative strength indicators are pointing lower, volatility has increased, but open interest has moved lower as the price moved to the downside since the January 8 high.

A critical level to watch at the end of this month is the December 2019 low.  

(Source: CQG)

The monthly chart illustrates that a close below $55.35 per barrel on the nearby NYMEX March futures contract would create a bearish reversal on the long-term chart. On Friday, January 31, we will find out if the crude oil futures market puts in a bearish pattern that could cause an increase in technical selling as we move into the second month of 2020.

 

2020 began with a move to the top end of the band

So far, in 2020, crude oil rose to a high on only the fifth trading session of the year. The US killed the leader of Iran’s revolutionary guard, and Iran retaliated by lobbing missiles in Iraq at airbases that house US troops. At the same time, a mistake by the Iranian military led to the downing of a commercial jet, killing 176 civilians.

While the year began with the US and Iran on the brink of an all-out war, all has been quiet on the Middle Eastern front since January 8. There have been no further incidents, and even the rhetoric between Washington and Teheran has calmed over the past weeks. However, the region of the world that is home to more than half the world’s crude oil reserves remains a political tinderbox.

 

A test of the bottom is on the horizon which could be a buying opportunity for three reasons

Last week, the price of crude oil fell to less than $4 above the level of technical support that contained the price of crude oil since January 2019. Many analysts are looking for NYMEX crude oil to move below the $50 level and challenge the December 2018 low of $42.36 per barrel. However, three factors could result in another low above $50.

Iran remains a clear and present danger in the Middle East. A rise in hostilities that threaten production, refining, or logistical routes in the region could cause a sudden recovery in the price of crude oil, as we witnessed in mid-September and early January. The odds of peace breaking out in the Middle East are at the lowest level in decades.

From a technical perspective, falling open interest when the price is moving lower, is not a technical validation of a bearish trend in a futures market. The oil market is likely to find solid support at the $50 level. Moreover, lower prices could cause a decline in US output, which is at a record 13 million barrel per day level. Last Friday, Baker Hughes reported that rig counts at 676 were 186 below the previous year. While production has become more efficient, lower prices will not encourage output in the US.

Finally, the outbreak of the Coronavirus in China created risk-off conditions in the oil market, as well as rippling through all asset classes last week. China is a leading consumer of crude oil, and fears that the virus will weigh on the Chinese economy exacerbated selling. At the same time, the de-escalation of the trade war between the US and China, which is a significant event that is supportive of Chinese economic growth, fell to a back-page story last week.

As crude oil approaches the bottom end of its trading range, risk-reward could be flashing that it is the wrong time to become overly bearish on the energy commodity.


The United States Oil Fund LP (USO) . Year-to-date, USO has declined -7.58%, versus a 21.71% 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.


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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