How is China affecting the global price of oil?

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August 26, 2019 12:44pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

From Andrew Hecht

  • Crude oil was sitting at over $55 per barrel early Friday

  • Recession is bearish for industrial commodities

  • Range trading still- China and Iran could push oil in either direction in a heartbeat

So far in 2019, the price of nearby NYMEX crude oil futures has traded in a range between $44.35 and $66.60 per barrel. The low for the year came at the very start, and the high in late April. The trading range of $22.25 in 2019 compares to a band of $34.54 in 2018, $18.46 in 2017, and $28.46 in 2016. The last time crude oil hit the $100 per barrel level was in 2014, and it has been below $77 since that year.

Bullish and bearish factors are pulling the price of crude oil in opposite directions these days. Last Friday, a quiet market gave way to selling on news from China. The United States Oil Fund (USO) and The United States Brent Oil Fund (BNO) are the two unleveraged ETF products that reflect the price action in the two benchmark crude oil markets.

Crude oil was sitting at over $55 per barrel early Friday

On Friday, August 23, the active month October NYMEX crude oil futures contract opened at over $55 per barrel. While the market was waiting to hear from Fed Chairman Jerome Powell in Jackson Hole, news from China sent the price of the energy commodity reeling on the downside. China slapped the US with $75 billion in retaliatory tariffs. After a somewhat dovish speech by the Fed Chairman, President Trump tweeted asking if China or Chairman Powell is the greatest enemy of the US. The stock market declined, and the price of crude oil moved lower by over $2 per barrel at the lows of the session.

(Source: CQG)

As the daily chart highlights, the energy commodity closed the session around the $54 per barrel level after trading to a low at $53.24. Technical metrics were pointing lower at the end of the session on the back of the escalation of the trade war and the rising threat of a global recession. After the market closed, President Trump responded by increasing tariffs on the Chinese in the high-stakes chess game over trade.

Recession is bearish for industrial commodities

The odds of a global economic slowdown rose at the end of last week. Protectionist policies tend to distort prices, and the escalation now threatens a global recession that would weigh on the prices of most industrial commodities. In 2008, during the global financial crisis, the price of oil fell from a peak at over $147 to a low at $32.48 per barrel. The price of copper, another bellwether industrial raw material declined from over $4.20 to a low at $1.2475 per pound. Last Friday, copper fell to a low at $2.5235 per pound, the lowest price for the red metal since June 2017.

Any optimism about the prospects for an end to the escalation of the trade war seemed to go out the window at the end of last week. A break below the $50 per barrel level in the NYMEX crude oil market could cause selling to intensify over the coming days and weeks.

Range trading- China and Iran could push oil in either direction in a heartbeat

Meanwhile, Iran continues to lurk in the background when it comes to the crude oil market. With the increase in economic pressure diverting the attention of the United States, the theocracy in Tehran could use the opportunity to provoke the nation they call the “Great Satan.” Any hostilities in the Middle East that impact the production, refining or logistical routes in the region would cause supply concerns. The area is home to over half the world’s crude oil reserves.

The trade situation is bearish for crude oil, but Iran remains a clear and present danger that could lift the price of the energy commodity in the blink of an eye. The oil market is likely to be nervous over the coming trading sessions.

Oil-related shares were among the worst-performing stocks on Friday, which is a bearish sign for the price of oil. However, the oil market is a complex jigsaw puzzle, and while a break to the downside looks imminent, events in and around the Persian Gulf could change that in a heartbeat.

The United States Oil Fund LP (USO) was trading at $11.24 per share on Monday afternoon, up $0.05 (+0.45%). Year-to-date, USO has declined -6.41%, versus a 8.32% 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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