- Looking for pre-pandemic consumption as early as Q4- Inventory data remains bullish
- The price of oil is sitting at just below $43 per barrel
- Technical factors point higher, and so does the price action in other commodities
The price of nearby October crude oil futures on NYMEX rose to a new high over the past week when it traded to $43.78 per barrel on August 26. The previous high for the October contract since the price carnage earlier this year was $43.68 on August 5.
The price of crude oil has been crawling higher. The energy commodity took an elevator shaft to the downside from late February through late April. The continuous futures contract fell below zero for the first time since trading began on NYMEX. The October contract declined to a low of $23.26 per barrel on April 20. The contango or premium for future delivery reflected the lack of storage capacity during the risk-off period in the energy commodity and other markets.
Stocks and commodities have made a significant comeback over the past four months. The leading equity indices have experienced a V-shaped recovery. Gold rose to a new all-time high. Lumber prices exploded to the upside to a new record level. Copper is probing above the $3 per pound level for the first time since 2018. A falling dollar and an unprecedented level of central bank and government stimulus are fueling gains in markets across all asset classes. Crude oil has participated in the rally, but its rise has been slow and steady.
OPEC, the international oil cartel, together with Russia and other world producers, cut production to balance the fundamental equation in the petroleum market. The United States Oil Fund (USO) moves higher and lower with a portfolio of crude oil futures contracts that trade on NYMEX.
Looking for pre-pandemic consumption as early as Q4- Inventory data remains bullish
After OPEC, Russia, and other world producers tapered their production cut from 9.7 to 7.7 million barrels per day starting in August, at the latest meeting, Russia and Saudi Arabia stressed compliance but left the current quota level in place. In a sign of optimism, the Saudi oil minister recently said he expects demand to recover to near pre-COVID-19 levels by the end of this year.
Last week, inventory data from both the American Petroleum Institute and the Energy Information Administration for the week ending on August 21 was bullish. The API reported a decline of 4.524 million barrels while the EIA said crude oil stocks fell by 4.70 million barrels. The API said gasoline inventories decreased by 6.392 million, and the EIA reported a drop of 4.60 million barrels. The two agencies said distillate rose by 2.259 million and 1.40 million barrels, respectively.
The inventory data remained bullish as it was the fifth consecutive week of declines. Meanwhile, according to the EIA, daily output stood at 10.8 mbpd, 17.6% below the March record high as of April 21. According to Baker Hughes, the number of rigs operating was 180 last Friday compared to 742 last year.
The price of oil is sitting at just below $43 per barrel- Hurricanes and a weak dollar provide support
Production cuts have gone a long way to balancing the fundamental equation for crude oil. Last week, September NYMEX futures rolled to October and continued to take the stairs higher.
As the daily chart of October futures highlights, the price rose to a new short-term high of $43.78 per barrel on August 26 as crude oil continued to crawl higher. Price momentum and relative strength indicators were above neutral readings at the end of last week, with the price at the $43 level. However, the technical indicators were below overbought readings, leaving room for gains. Open interest at 2.066 million contracts has been gently rising with the price since late July, a technical validation of the bullish trend. Daily historical volatility fell to 17.3% at the end of last week. The metric peaked at 155% in March. The daily trading ranges in the crude oil market have declined dramatically, as the price has been rising at a snail’s pace.
As a Hurricane Laura was bearing down on the Louisiana and Texas coast last week, the storm strengthened to a category 4 plus with winds of 150 miles per hour. The potential for catastrophic damage lifted the prices of crude oil and natural gas. Few market participants were willing to take the risk of a short position, given the uncertainty of the storm’s impact.
Technical factors point higher, and so does the price action in other commodities
The technical position of crude oil daily, weekly, and monthly charts continues to display bullish price trends. As of August 28, the oil market posted gains over the past four straight months.
Meanwhile, a falling dollar is another bullish factor for the energy commodity. The dollar is the benchmark pricing mechanism for most commodities, and crude oil is no exception. A declining dollar tends to lift raw material prices. Moreover, other commodity prices are rising. Lumber traded to a new record high at $916.30 last week. Copper was probing above the $3 per pound level for the first time since mid-2018. Gold rose to a new all-time high in August, and the price of silver more than doubled since March.
The tidal wave of stimulus from governments and central banks and a falling dollar is bullish fuel for commodity prices. The trend in crude oil remained higher at the end of last week. The target on NYMEX October futures is now at the March high at $49 per barrel. On the continuous futures contract, the mid-February peak at $54.50 is the first level of resistance.
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The U.S. Oil Fund LP (USO) rose $0.10 (+0.33%) in premarket trading Tuesday. Year-to-date, USO has declined -70.04%, versus a 10.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…