Will Oil Prices Continue to Rise?

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January 7, 2020 10:11am NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • A bullish end to 2019
  • The Middle East is supportive of prices
  • Rig counts and inventories help the rally

At the end of last week, the price of crude oil moved to a new high, and a higher level than after the drone attack on Saudi oilfields in September 2019. On January 2, a US airstrike killed a high-profile Iranian military commander. The political temperature in the Middle East has not risen to its current level in decades.

Meanwhile, the airstrikes were in response to increasing Iranian aggression in the region. At the end of December, a siege at the US embassy in Baghdad brought back memories of the late 1970s when Iranian revolutionaries held US embassy personnel hostage from 1979 through the early days of 1981. With Iran’s fingerprints on the embassy attack over the holidays, the airstrike that killed General Soleimani at Baghdad’s airport was a warning and retribution for the attack on US interests in the region. Moreover, the US said that the elimination of the General was a necessary preventative measure.

The Middle East is the world’s most turbulent political region, and at the very beginning of the 2020s, the temperature rose to a new high. The price of crude oil is a barometer for trouble in the area that is the home to more than half the world’s crude oil reserves.

The United States Crude Oil Fund (USO) and the United States Brent Crude Oil Fund (BNO) move higher and lower with WTI and Brent futures.

A bullish end to 2019

In 2019, the price of crude oil traded in a range from $44.35 to $66.60 per barrel. The price closed the year a lot closer to the highs than the lows. The last significant low at $50.99 came during the first week of October. Since then, the price took the stairs higher, reaching a peak of $62.34 on December 30, and closing the year at just over $61 per barrel.

(Source: CQG)

As the daily chart shows, the price took off on the upside on the second trading session in 2020. The airstrike that killed a high-profile Iranian general and the leader of Iran’s revolutionary guard vaulted the price to a higher high at $64.09 per barrel. Since few market participants wanted to go home short crude oil over the weekend in the current environment, February NYMEX futures settled at over $63 per barrel last Friday, the highest level since April on the continuous futures contract. On the February contract, the last time NYMEX crude oil traded above $64 was in November 2018.

2019 ended on a bullish note, and the energy commodity was singing the same tune during the first days of 2020.

The Middle East is supportive of prices

Iran has been a bullish factor for the price of crude oil since President Trump walked away from the nuclear nonproliferation agreement in 2018 and slapped sanctions on the theocracy in Teheran. In 2019, there were multiple incidents where Iran attempted to interfere with oil tankers passing through the Straits of Hormuz. In September, a drone attack that had Iranian fingerprints temporarily took out half of Saudi Arabia’s production. The growing tension between Iran and the Saudis and the US has underpinned the price of crude oil throughout 2019. Iran was likely the reason that the price had not ventured below the $50 level since January 2018.

Since Brent crude oil is the benchmark for Middle Eastern crude oil, the price of Brent outperformed NYMEX WTI futures on January 3.

(Source: CQG)

The chart of the price of March NYMEX crude oil futures minus March ICE Brent futures shows that the Brent premium expanded from $5,30 on January 2 to $5.83 per barrel on January 3. The Brent-WTI spread is both a location and a quality spread, but it also serves as a political risk barometer for the Middle East.

Rig counts and inventories help the rally

Aside from Iran, which could push the price of crude oil appreciably higher over the coming weeks, the latest rig counts and inventory data has been supportive of higher oil prices.

On December 31, the American Petroleum Institute said that US stockpiles of crude oil declined by 7.8 million barrels for the week ending on December 27. Even though the Energy Information Administration reported that US output remained at a record high of 12.9 million barrels per day, the EIA said petroleum inventories fell by 11.5 million barrels for the same week.

Meanwhile, the latest rig count in the US as of January 3 showed that 670 rigs were operating in the US, which was seven lower than the previous week and 207 below the level last year at the same time according to Baker Hughes.

Rig counts and inventory data were supportive of the price of crude oil last week, but it was the Middle East that will have the most significant impact on the price of the energy commodity as we move further into 2020.

The next level to watch on the upside is the 2019 high at $66.60. Above there, the 2018 peak was at $76.90 per barrel.

The United States Oil Fund LP (USO) was trading at $13.14 per share on Tuesday morning, down $0.02 (-0.15%). Year-to-date, USO has gained 9.41%, versus a 21.33% 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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