- Last year’s price action was ugly
- $50 keeps holding
- I am bullish on oil with a stop below $49 per barrel
The price of crude oil continues to bounce off the $50 per barrel level on the active month NYMEX futures contract. Bullish and bearish factors have been pulling the energy commodity in opposite directions throughout 2019.
Last year, the price range in the NYMEX futures market was from $42.36 to $76.90 per barrel. The high was in October, and low came at the end of the year. This year, oil has traded from a low at $44.35 to $66.90, with the low coming in January and the high in April. The trading band has narrowed compared to last year.
Crude oil continues to flirt with the downside, but each time the price approaches the half-century market, buying seems to emerge. Buying dips and selling rallies has been the optimal approach to the crude oil market over the past months. The United States Oil Fund (USO) replicates the short-term price action in the NYMEX crude oil futures market. USO is the oil ETF product with the most significant net assets. The UCO and SCO products are double leveraged instruments on the up and downside that magnify the price movement in the NYMEX futures market on a percentage basis.
Last year’s price action was ugly
We are now in the fourth quarter of 2019. In 2018, the final three months of the year were a period of price carnage in the crude oil futures market.
As the weekly chart highlights, the price of crude oil fell from $76.90 in early October 2018 to a low at $42.36 in late December last year. The range in crude oil last year was $34.54 per barrel. So far, in 2019, the range narrowed.
$50 keeps holding
Since February, the bottom came in August at $50.52 per barrel. On September 14, the attack on Saudi oilfields that knocked out 50% of Aramco’s production caused the price of oil to spike to a lower high at $63.38 per barrel. However, increased US production running at 12.6 million barrels per day tempered the rally. The Saudis returned output to pre-attack levels at the end of September, and the price of crude oil declined back towards the bottom end of its trading range.
The daily chart shows that the price of NYMEX crude oil futures has been bouncing off lows at just above the $50 per barrel level since August. Crude oil has traded in a $16.08 range since January, which is less than half the trading band in 2018.
The $50 level has become a line in the sand for crude oil these days, while bullish and bearish factors continue to pull the price of the energy commodity in opposite directions.
I am bullish on oil with a stop below $49 per barrel
At below $55, buying on a scale-down basis and taking scale-up profits when the price was above $55 has been the optimal approach to the crude oil market throughout 2019. I would only trade from the long side of the market because of the potential for further provocative actions by Iran. The Middle East is home to over half the world’s crude oil reserves. Any hostilities that impact production, refining, or logistical routes in the region could cause short-term price spikes to the upside, as we witnessed in mid-September. If the price declined below the $49 per barrel level, I would abandon the strategy.
The most direct route for a risk position in the crude oil market is via the futures that trade on the NYMEX division of the CME and the Intercontinental Exchange. However, the UCO and SCO products are short-term trading tools that magnify the price action on NYMEX futures and are available to anyone with a standard equity trading account.
Trading rather than investing is likely to provide optimal returns while the price of crude oil remains in its trading range.
The United States Oil Fund LP (USO) was trading at $11.30 per share on Tuesday morning, up $0.09 (+0.80%). Year-to-date, USO has declined -5.91%, versus a 13.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andrew 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.