What’s going on with oil prices?

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September 10, 2019 10:16am NYSE:USO

NYSE:USO | News, Ratings, and Charts

From Andrew Hecht

  • Up and down but with no direction

  • Trade and Iran are critical issues

  • The US economy is sensitive to oil prices, but not like in the old days

The price of crude oil has been trading in around a $10 range since late May. Each time the price moves above $55 per barrel it looks like a break to the upside above the 2019 high at $66.60 is on the horizon. When the price is below the midpoint at $55, it feels like crude oil will hop on an express train to the downside for a test of December 2018 low at $42.36 is just around the corner.

Bullish and bearish factors continue to pull the price of the energy commodity in opposite directions.

The United States has become the world’s leading producer of crude oil. With daily production at over 12 million barrels per day, US output is now higher than Saudi Arabia and Russia. The US economy has always been sensitive to the price of oil. Meanwhile, the dynamic has changed over the past years. The US is still the world’s leading consumer of the hydrocarbon. As the world’s leading producer, a sharp decline in the price of oil that was a windfall in the past, could now be a weight around the neck of the nation with the world’s leading GDP. The United States Oil Fund (USO) tracks the price of WTI crude oil futures. WTI is the benchmark pricing mechanism for the energy commodity produced in the United States.

Up and down but with no direction

Nearby October crude oil futures on the NYMEX futures exchange settled at $56.42 per barrel on Friday, September 6. The price was slightly above the midpoint of the $50 to $60 trading range, but the energy commodity spent equal time above and below the pivot point.

(Source: CQG)

The daily chart highlights that last week’s range was from $52.84 to $57.76 per barrel. Ironically, the midpoint was at $55.30, just 30 cents above the midpoint of the trading range. Since the market settled slightly above the middle of the range, technical metrics were slightly above neutral territory. Daily historical volatility at 36.2% reflects the wide intraday trading ranges in a market stuck in the band. Open interest, the total number of open long and short positions in the NYMEX futures market recently rose from 1.978 to 2.079 million contracts as the price has made higher lows. Rising open interest and price in a futures market tends to be a technical validation of a bullish trend. The technical state of the market could be telling us that crude oil is heading for the top end of its trading range.

Trade and Iran are critical issues

Last week, news from China supported the price of crude oil. Positive economic data and a message from Beijing that the Chinese are prepared to negotiate in good faith with the US on trade lifted the prices of stocks, copper, and crude oil. The threat of a global recession triggered by the ongoing trade war had weighed on the price of the energy commodity. News that reduced dangers for the economy were a supportive factor for the oil market.

Meanwhile, US sanctions on Iran continue to threaten periods of provocative action in the Middle East. So long as the US continues to tighten the economic noose around the neck of the theocracy in Teheran, the threat of actions that increase supply concerns will keep a bid under the price of the crude oil futures market.

The US economy is sensitive to oil prices, but not like in the old days

Meanwhile, falling crude oil price was great news for the US economy in the old days when the world’s leading consumer nation was dependent on Middle Eastern crude oil supplies. These days an energy-friendly administration combined with technological advances in extracting crude oil from the crust of the earth has made the US the world’s leading producer of oil. Output in the United States stood at 12.4 million barrels per day for the week ending on August 30, according to the Energy Information Administration. According to Baker Hughes, the number of oil rigs operating in the US was at 742 as of September 6, 120 fewer than last year at this time. Increased production with decreasing rigs is a sign of efficiency.

US output has surpassed Saudi Arabia and Russia to lead the world. Therefore, a significant decline in the price of oil could harm the US economy as it could cost jobs and the loss of profits for companies in the oil patch. The US economy has always been sensitive to oil prices, but the dynamics have changed because of the growth of production. Lower oil prices are not likely to have the same stimulative impact on the US economy as in the past. A sudden drop could turn out to have just the opposite effect.

The United States Oil Fund LP (USO) was trading at $12.11 per share on Tuesday morning, up $0.03 (+0.25%). Year-to-date, USO has gained 0.83%, versus a 11.45% 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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