Oil Prices: Key Levels to Watch as We Enter into 2020

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December 23, 2019 11:23am NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • OPEC cuts and the “phase one” trade deal saved crude oil
  • The price action has been moderately bullish
  • Levels to watch on the up and downside

The energy commodity that powers the world has been moving steadily higher since reaching a low at $50.44 per barrel on October 3 on the now active month February NYMEX futures contract. The most recent high came on December 19 at $61.40, as the price has moved 21.7% higher during the final quarter of 2019. The price action has been a reversal of fortune for the crude oil futures market, which fell from $76.90 to $42.36 per barrel during the fourth quarter of 2018. The decline of 44.9% last year at this time set the stage for the recovery in 2019.

The fourth quarter of 2018 defined the high and low for the price of crude oil last year. In 2019, the energy commodity traded in a narrower range from $44.35 to $66.60 per barrel and remained within the range so far in the final quarter. The low in 2019 came during the first week of the year, with the high in April. The recent rally in the oil futures market has been slow and steady, and all signs are that the energy commodity could be heading for a test of the 2019 peak. The United States Oil Fund (USO) tracks the price of nearby NYMEX crude oil futures on a short-term basis.

OPEC cuts and the “phase one” trade deal saved crude oil

Had it not been for the announcement of the trade deal with China and the OPEC production cuts, the price of nearby NYMEX crude oil futures would likely be hovering around the $50 rather than the $60 per barrel level.

While the price of the energy commodity was on its way higher since early October, the December 6 news from OPEC caused a bullish reversal on the daily chart. The December 13 news that the US and China agreed on terms for the “phase one” trade deal since prices higher to over the $60 level. Crude oil posted gains for six consecutive trading sessions from December 12 through December 19.

The price action has been moderately bullish

While the price of the energy commodity fell last Friday, the correction only took the February futures contract to a low at $60.02 before settling at $60.44 per barrel.

(Source: CQG)

As the daily chart highlights, the move to the upside has been a grind higher. Price momentum has risen to overbought territory along with the relative strength indicator. Since the rally has been slow and steady, daily historical volatility fell to 10.76% at the end of last week from over 37% at the start of December. In the crude oil futures market, volatility tends to increase when the price declines as oil futures often take the stairs to the upside and an elevator lower during corrective periods.

Meanwhile, open interest declined from 2.237 million contracts on December 9 to 2.156 at the end of last week. The drop of 81,000 contracts was likely because of the roll from January to February futures. At the same time, house-cleaning when it comes to risk at the end of the year liked caused some market participants to exit risk positions. The trend in the oil market remained higher at the end of last week, but the ascent has been modest. One bearish factor over the past week was the EIA and API inventory reports as of December 13.

Levels to watch on the up and downside

During the final days of 2019, we could see the price drift back down towards the midpoint of the year, which stands at around the $55.50 per barrel level.

(Source: CQG)

The weekly chart illustrates that the critical levels of support and resistance are at $50.52 and $66.60 since April. Therefore, the first target on the downside is at the $58.56 level, which is the midpoint of the trading range.

I do not expect all that much price action in oil over the coming week and through New Year’s Eve. However, with Iran lurking in the Middle East, the potential for a price spike remains on the up rather than the downside.

The United States Oil Fund LP (USO) was trading at $12.62 per share on Monday morning, down $0.01 (-0.08%). Year-to-date, USO has gained 5.08%, versus a 20.98% 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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