Oil – An Important Level for Investors to Watch

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August 19, 2019 12:42pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

From Andrew Hecht

  • Oil prices have been under pressure
  • The energy commodity does not do well with risk-off
  • A level to watch on the downside

The price of crude oil was trading at just under the $55 per barrel level at the end of last week. The price of the energy commodity that powers the world was around $11 below the high in 2019 and $11 above the lows over the past eight months. The price action in the crude oil futures market that trades on NYMEX has been bearish. However, the floor has not given way to an elevator ride to the downside for the price of oil. Rising fears of global recessionary pressures have weighed on the oil market. At the same time, tensions in the Middle East between the US and Iran are likely holding the price around the midpoint of this year.

Crude oil tends to have a rough time when risk-off periods occur in markets. Macroeconomic events can cause the price of crude oil to fall down an elevator shaft.

The most liquid ETF product that tracks the price of NYMEX crude oil futures is the United States Oil Fund (USO). USO rises and falls with the price of the energy commodity.

Oil prices have been under pressure

Since late April, the price of crude oil has been making lower highs.

Source: CQG

As the daily chart highlights, at just under the $55 per barrel level on Friday, August 16, nearby NYMEX crude oil futures were in the middle of this year’s trading range. Both price momentum and relative strength indicators are in neutral territory. Open interest has hovered around the two million contract level, and weekly historical volatility at 32.6% is also around the midpoint level for this year. While crude oil has been under pressure, bullish and bearish factors continue to pull the price of the energy commodity in opposite directions.

The energy commodity does not do well with risk-off

While Iran remains a bullish factor for the price of oil these days, the rising potential of a risk-off period in all markets is a warning for the oil market. The last significant risk-off event occurred during the global financial crisis in 2008.

Source: CQG

The monthly chart shows that the price of oil plunged from a high at $147.27 in July 2008 to a low at $32.48 just five months later in December. Another example came in early 2016 when the price fell to a lower low at $26.05 per barrel on contagion from slowing economic growth in China.

The trade and currency war between the US and China continue to weigh on the global economy. Central banks around the world are slashing interest rates as fears of a recession increase. The stock market has been shaky over recent weeks. Over the coming weeks and months, the markets will face the potential for a hard Brexit which could cause risk-off conditions in markets across all asset classes. While the US Federal Reserve calls the factors facing markets “crosscurrents,” I prefer to call them flashing warning signs. Perhaps the most significant sign of pending volatility has been the rush into safe-haven assets like gold, long-term US government bonds, and the US dollar.

Given the path of crude oil over the past years during risk-off periods, it is wise to be highly cautious when approaching the energy commodity or related stocks or ETF products these days. To complicate matters, the situation in the Middle East could still cause price spikes to the upside in the oil futures market if supply concerns increase because of any hostilities.

A level to watch on the downside

Crude oil tends to take the stairs to the upside and the elevator shaft lower. Therefore, watching the critical technical support levels is crucial.  

Source: CQG

The weekly chart shows that $50 per barrel stands as a line in the sand on the downside for nearby NYMEX crude oil futures. In a risk-off period, the $50 level could be the gateway to substantial selling. Below there, the late 2018 low at $42.36 per barrel will stand as the next target on the downside.

Crude oil does not do well in risk-off environments. However, with Iran in the picture, those bullish and bearish factors continue to make the path of least resistance in the oil market a coin toss.

The United States Oil Fund LP (USO) was trading at $11.53 per share on Monday afternoon, up $0.13 (+1.14%). Year-to-date, USO has declined -4.00%, versus a 9.99% 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 ETFDailyNews.com.

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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