Oil remains volatile amid uncertainty over production cuts

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April 6, 2020 4:15pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

 

  • A move from the low last week
  • President Trump- The US oil minister?
  • Ten million barrels could do the trick

 

When OPEC and Russia decided to flood the world with crude oil on March 6, the price fell to its lowest level since 2002. The first sign that crude oil was in trouble came in January 2020 when the energy commodity put in a bearish reversal trading pattern on the monthly chart. On January 8, the price rose to $65.65 per barrel on the back of hostilities between the US and Iran in Iraq. The peak during the first month of this year was higher than the high from December 2019. As calm returned to the Middle East, the price closed January below the low from the previous month, causing the bearish price pattern. 

At the end of the first quarter of this year, crude oil put in the same pattern on the long-term quarterly chart. Oil fell to a low of $19.27 on the nearby NYMEX futures contract in March. 

Last week, as speculative shorts continued to move into the oil arena, the prospects for a deal that would stabilize the price of the energy commodity began to take shape. In early March, Russia and Saudi Arabia’s attempt to push the price of petroleum to a level that would end US oil independence wound up shooting the other two leading producers of the energy commodity in their own feet. At below $20 per barrel, no producer can emerge a winner. And, the demand destruction on the back of the global pandemic means that consumers that are locked in their homes cannot enjoy the benefits of lower energy costs. After reaching a low at the start of last week, the price of oil suddenly recovered on the prospect of a win-win deal between the world’s three top producing countries. The United States Oil Fund (USO) tracks the price of the energy commodity higher and lower on a short-term basis. 

 

A move from the low last week

Significant price volatility continued to grip the oil market last week as the price dropped to a new low at $19.27 per barrel on the nearby NYMEX futures contract on Monday, March 30.

(Source: CQG)

As the chart highlights, the crude oil futures market experienced its first significant recovery after probing below the $20 per barrel level. The price rose to a high of $29.13 on April 3, a rise of over 50% from the price at the start of last week. Daily historical volatility was at over the 135% level as of April 3.  

 

President Trump- The US oil minister?

On April 2, a tweet from US President Trump lit a bullish fuse under the price of the energy commodity.

(Source: Twitter)

On Friday, Russian President Vladimir Putin added his comments saying, “We are ready to reach terms with partners within the framework of OPEC+ and are ready to cooperate with the United States on this issue. I believe that it is necessary to combine efforts in order to balance the market and reduce output.” Russia could agree to participate in a 10 million barrel per day production “on a partnership” basis. 

The decline in the price of crude oil may have put the international oil cartel to sleep, but a triad of the world’s three leading oil producers could be emerging from OPEC’s rubble to stabilize the energy commodity. 

 

Ten million barrels could do the trick

The oil market needs a boost as demand destruction on the back of the global pandemic, together with increased output, is filling storage around the globe after reaching the lowest price since 2002. 

OPEC went into its meeting on March 5-6 with around a 2-million-barrel production cut, and the Saudis had advocated adding another 1.5 million barrels. A ten-million-barrel reduction that includes the US would mean 6.5 million barrels more than the Saudi’s favored removal from the market. President Putin said he supports a deal that would put the price of the energy commodity at $42 per barrel. Ten million barrels may do the trick. An agreement between the three producing countries could lead to a USRSA oil protocol that replaces OPEC. 

Over the weekend, the rift between Saudi Arabia and Russia continued, pushing the price of nearby NYMEX crude oil futures lower on Monday, April 6 to below $27 per barrel. However, both sides continue to work on a deal, which prevented the energy commodity from falling to the recent low at below $20 per barrel. Expect lots of volatility in the oil market over the coming days and weeks. 

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The United States Oil Fund LP (USO) was trading at $5.50 per share on Monday afternoon, down $0.40 (-6.78%). Year-to-date, USO has declined -54.20%, versus a -1.50% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of F (Strong Sell), and is ranked #65 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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