Why is Oil Trading at 3-month Highs?

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December 17, 2019 11:17am NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • The production cut held the price

  • US inventory data last week once again validates the cartel’s move 

  • OPEC’s rooting for the opposition party in the 2020 US election

On Friday, December 6, the international oil cartel cut its production from 1.2 to 1.7 million barrels of the energy commodity per day. The Saudis added another 400,000 barrels to the reduction, lifting it to 2.1 million barrels. The price action that followed the move by OPEC was a sign that oil was heading lower in the absence of a change to production policy. Crude oil continued to trade closer to the recent highs than the lows over the past week.

As we head into a new decade next month, the trend in the world is to shake the addiction to fossil fuels replacing them with alternative energy sources. Last week, in a sign of shifting global sentiment, Time Magazine named a Swedish teenage environmentalist as its person of the year.

Meanwhile, the global demand for crude oil and oil products is not going away any time soon. The United States Oil Fund (USO) tracks the price of crude oil futures on the NYMEX division of the CME on a short-term basis.

The production cut held the price

The OPEC production cut steadied the crude oil market in the wake of the cartel’s meeting on December 5 and 6.

(Source: CQG)

The price of nearby NYMEX crude oil futures was trading at the $58.33 per barrel level on December 5, before OPEC announced its production decision for the first half of 2020. Since December 6, the price range in the active month January futures has been from $57.70 to $60.48 per barrel. The low came on December 6, but crude oil futures put in a bullish reversal on the daily chart on that day. The high came last Friday as news of a “phase one” trade deal between the US and China lifted the prospects for global economic growth.

Had OPEC left production policy unchanged, we would have likely seen the price of nearby NYMEX crude oil move back down towards the bottom end of its trading range at $50 per barrel.

US inventory data last week once again validates the cartel’s move 

The United States is energy independent when it comes to crude oil and natural gas production. Technological advances in extracting the energy commodity from the crust of the earth together with regulatory reforms under the Trump administration have made the US the world’s leading oil and gas producing nation.

Last week, the Energy Information Administration reported that daily crude oil output in the US stood at 12.8 million barrels per day, only 0.10 below the record high from the previous two weeks.

When it comes to inventories, the American Petroleum Institute said that stockpiles of crude oil rose by 1.41 million barrels for the week ending on December 6, while the EIA noted they increased by 800,000 barrels. Moreover, both sources reported significant increases in oil product inventories. The API said that gasoline and distillate stocks moved 4.9 million and 3.2 million barrels higher. The EIA data shows a rise of 5.4 million and 4.1 million barrels, respectively.

Rising US output was one of the primary reasons for OPEC’s move to stabilize the price of crude oil by cutting its production.

OPEC’s rooting for the opposition party in the 2020 US election

If the international oil cartel could vote in the 2020 Presidential election in the United States, I suspect it would cast its ballot for the opposition party. The Democrats have embraced the “Green New Deal.” While the face of the policy stance is bearish for the price of crude oil, the short-term impact could be bullish for the energy commodity. More stringent US regulations on fracking and oil production would hand the power in the oil market back to OPEC on a silver platter for the coming years. It will take a long time for the world’s addiction to crude oil to decline. At the same time, one of the world’s leading oil producers is preparing for a shift away from fossil fuels in the long term.

Last week, Saudi Arabia sold shares of its state oil company Aramco on its local exchange. The shares were up the limit on the first day of trading, making the IPO highly successful. The price action in the stock put the valuation of Aramco at around $1.9 trillion, which is, by far, the highest market cap of any company in the world. The Saudis will use the proceeds to the IPO to make investments that diversify its economy away from dependence on oil-related revenues.

NYMEX crude oil was flirting with $60 per barrel at the end of last week. A combination of the OPEC production cut and a “phase one” trade deal between the US and China pushed the price of the energy commodity higher. While the news was bullish, the price of oil was not running away on the upside, which is a sign that OPEC’s move was necessary for price stability.

The United States Oil Fund LP (USO) was trading at $12.70 per share on Tuesday morning, up $0.11 (+0.87%). Year-to-date, USO has gained 5.75%, versus a 20.39% 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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