Is Oil Going To Plunge Under $50?

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October 15, 2019 11:30am NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • Crude oil holds the $50 per barrel level
  • Inventory data was neutral
  • Processing spreads continue to climb

The price of crude oil was trading around the $54.70 per barrel level at the end of last week on the nearby NYMEX futures contract. Last year at this time, the price of the energy commodity was moving lower. In early October 2018, crude oil began to fall from a high of $76.90 per barrel. At the end of 2018, the futures market reached a bottom at $42.36, 44.9% below the high.

Crude oil is the energy commodity that powers the world. The ongoing trade war between the US and China has weighed on the price of oil as the threat of a global recession does not support demand. At the same time, the tensions in the Middle East have been rising. On September 14, a drone attack on Saudi production knocked out 6% of the world’s supply. The price of oil briefly spikes higher to over $63 per barrel, but it came back down after the Saudis returned output to the pre-attack level. In 2019, bullish and bearish factors continue to pull the price of oil in opposite directions. The United States Oil Fund (USO) is an ETF product that tracks the price of nearby NYMEX crude oil futures.

Crude oil holds the $50 per barrel level

Seasonality does not favor the upside in the crude oil market at this time of the year. Memories of the price action in 2018 is also a warning sign. The price of nearby NYMEX crude oil futures is flirting with the bottom end of its trading range. Meanwhile, the price has remained above the $50 per barrel level as of the end of last week.

As the weekly chart highlights, the energy commodity experienced three consecutive weeks of losses following the highs in the aftermath of the attack on Saudi production. The trend is leaning lower, but price momentum and relative strength indicators are in neutral conditions. The total number of open long and short positions in the futures market has not moved all that much over the recent weeks. Critical technical support is at the $50.52 per barrel level, which was a little over $4 below the price at the end of last week.

A marginal new low that keeps the price above $50 per barrel would not necessarily trigger a herd of selling. However, a break below the psychological half-century mark could have a devastating impact on the price of the energy commodity.

Inventory data was neutral

Last week’s inventory data was bearish when it comes to crude oil, but bullish for oil products. The API and EIA reported increases in stockpiles of 4.13 million and 2.90 million barrels, respectively, which weighed in the price of oil futures. However, the data for oil products told a different story.

The API reported that gasoline stocks fell by 5.94 million barrels and distillates declined by 3.98 million barrels. The EIA reported a drop of 1.2 million barrels of gasoline inventories and 3.9 million barrels of distillates. Oil product demand tends to translate into rising requirements for crude oil. Therefore, the fundamental supply and demand picture for the energy commodity was not all that clear at the end of last week.

Processing spreads continue to climb

One of the most supportive factors for the crude oil market these days is the price action in crack or refining spreads. At this time of the year, gasoline demand tends to fall as the peak season for driving in the UK ends in September.

Source: CQG

The weekly chart of the gasoline crack spread shows that it appreciated from $7.48 in mid-September to over $14 per barrel last week. The price of gasoline outperformed the price action in the crude oil market, which is a sign of demand for the fuel.  

Source: CQG

Heating oil futures serve as a proxy for other distillates like diesel and jet fuels. The chart of the heating oil processing spread shows that the refining margin has moved from $21.09 in mid-September to a high at over $28 last week.

Crude oil is the primary ingredient in both gasoline and distillate oil products. The rise in crack spreads could be the factor that keeps the price of the energy commodity above the $50 per barrel level over the coming days and weeks.

The United States Oil Fund LP (USO) was trading at $11.22 per share on Tuesday morning, up $0.04 (+0.36%). Year-to-date, USO has declined -6.58%, versus a 12.61% 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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