Will Crude Oil Hold $50 or Continue Lower?

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February 11, 2020 4:10pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • Oil plunges 24.9% is under one month
  • NYMEX crude oil futures fall to new lows on calm in the Middle East and Coronavirus- OPEC is in the background
  • A level to watch on the downside at the end of March following the bearish reversal in January

Crude oil is the energy commodity that powers the world. While the use of alternative fuels that are more environmentally friendly is rising and will continue to take market share away from the fossil fuel, oil remains the most significant source of energy for most nations around the world.

The path of least resistance of the price of crude oil is a complex equation that includes economics, geopolitics, and the market’s sentiment. Since the Middle East is home to over half the world’s petroleum reserves, the world’s most turbulent political region can cause price volatility in the oil futures arena. In mid-September 2019, a drone attack on Saudi oilfields briefly lifted the price of oil futures. On January 8, as tensions between the US and Iran reached a boiling point, the price of crude oil moved to a higher high. However, growing US production at around the 13 million barrel per day level kept the price action on the upside in check.

The price of crude oil had been moving steadily higher from early October 2019 through early January 2020. The January 8 rally created what turned out to be a blow-off top in the oil futures market. Since then, the price took an elevator to the downside and gave up three months’ worth of gains in a little under one month. Last week, the price dropped to a level that could be a significant bottom in the crude oil market, but time will tell if the dip to below $50 per barrel will stand as the new level of technical support and a launchpad for another period when the price takes the stairs higher. The United States Oil Fund (USO) tracks the price of NYMEX WTI crude oil futures on a short-term basis. The United States Brent Crude Oil Fund (BNO) follows the price of Brent futures on the Intercontinental Exchange.

Oil plunges 24.9% is under one month

The oil market erased more than three months of gains in under one-third the period from January 8 through February 4.

Source: CQG

As the weekly chart shows, the elevator took the price of nearby NYMEX futures from $65.65 to a low of $49.31 per barrel. The trend in the crude oil market continues to be lower after probing below the $50 per barrel last week. Price momentum and relative strength indicators continue to decline as they are now in oversold territory. Open interest has increased from under 2.15 million to over 2.257 million contracts since mid-January. Falling price and rising open interest is a technical validation of the current bearish trend. Weekly historical volatility rose from under 20% at the end of 2019 to over 31% at the end of last week. The elevator ride to the downside has increased the weekly trading ranges. Last week marked the fifth consecutive week of losses in the crude oil futures arena. The price of nearby March futures settled at $50.32 per barrel on Friday, February 7, just $1.01 above the most recent low. The bounce that took then price back above the $50 level has not been all that convincing.

NYMEX crude oil futures fall to new lows on calm in the Middle East and Coronavirus- OPEC is in the background

The last time the price of crude oil experienced a lower weekly closing price was over one year ago during the week of December 31, 2018. The price of oil spiked to the upside when tensions between the US and Iran reached a boiling point with the attack on an Iraqi airbase that was home to US troops. However, in the aftermath of the missile launch and tragedy that killed civilians aboard an aircraft taking off from Teheran, the situation in the region calmed. There have been no further hostilities in the area which caused selling in the crude oil futures market.

The “phase one” trade deal between the US and China was a bullish sign for the Chinese economy and the demand for crude oil. However, the outbreak of Coronavirus trumped the trade agreement as China’s economy has ground to a halt. As the price probed below the $50 per barrel level this week, Brent crude oil declined under $55 per barrel on the nearby April futures contract.

Source: Barchart

The chart shows that the price of Brent futures fell from a high of $71.99 on January 8 to a low of $53.69 on February 4 or 25.4%, even more of a drop that the NYMEX WTI futures. April Brent was trading at the $54.54 per barrel on February 7.

Since the international oil cartel said that its target range for Brent is from $60-$70 per barrel, OPEC is now considering further production cuts. While the potential for an even deeper output reduction caused the price of oil to rebound at the end of last week, marginally, Russia has not yet said that they would participate in lower production quotas. OPEC will meet in early March to assess the recent reduction, and the lower the price of oil declines, the higher the chances are that the cartel will act to stop the falling knife in the petroleum futures markets.

A level to watch on the downside at the end of March following the bearish reversal in January

Crude oil put in a bearish reversal in January on the monthly chart as the price made a higher high than in December 2019 and closed on January 31 below the December low. The bearish pattern likely caused follow-through selling in early February that took the price below $50 per barrel last week.

 Source: CQG

The quarterly chart shows that it is threatening to put in the same bearish reversal if the price of nearby NYMEX futures closes below the $50.99 per barrel level at the end of March. There is plenty of time between this week and the end of the first quarter, but another bearish reversal on an even longer-term chart could pose a continuation of technical problems in the oil market.

Crude oil bounced a bit at the end of last week, but the bearish trend in the energy commodity is far from out of the woods.

The United States Oil Fund LP (USO) was trading at $10.47 per share on Tuesday afternoon, up $0.05 (+0.48%). Year-to-date, USO has declined -12.82%, versus a 26.13% 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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