- A drop below $50 per barrel
- The December 2018 low could act as a magnet
- A low in February- March could be another story
Calm in the Middle East since January 8, the outbreak of Coronavirus in China, and rising US inventories combined to weigh on the price of crude oil. Last week, the price of the energy commodity continued to trade around the $50 per barrel level on the nearby NYMEX March futures contract. The price did not drop below the February 4 low of $49.31 before bouncing over the past week.
The American Petroleum Institute reported that crude oil inventories for the week ending on February 7 rose by 6 million barrels, and the EIA said they moved 7.5 million barrels higher over the same period. Since early October, the API and EIA stocks of crude oil in the US have increased by 20.003 million and 19.80 million barrels, respectively.
The move below the $50 level was a significant event as crude oil had not traded under the half-century mark since early January 2019. Meanwhile, February tends to be a time of the year when the price of the energy commodity often finds a bottom. The United States Crude Oil Fund (USO) tracks the price of nearby NYMEX crude oil futures on the up and downside.
A drop below $50 per barrel
The price of nearby March NYMEX crude oil futures settled at $52.05 per barrel on Friday, February 14, after probing below the $50 level for the first time in over one year.
(Source: CQG)
As the daily chart of March futures highlights, crude oil found at least a temporary bottom at $49.31 per barrel. The price recovery caused price momentum and relative strength indicators to cross higher in oversold territory. Both metrics displayed neutral technical conditions at the end of last week. Daily price volatility at just over the 34% level remains elevated.
Meanwhile, the total number of open long and short positions in the oil futures market peaked at 2.272 million contracts on February 4, the day that the price slipped to the low. The metric declined to 2.193 million contracts at the end of last week. Rising open interest when the price falls is typically a technical validation of a bearish trend in a futures market. At the same time, the metric declined as the price recovered, which is not usually a sign of an emerging bullish trend. Therefore, the open interest metric could be signaling that the bounce could run out of steam, and crude oil is likely to move back below the $50 per barrel level.
The December 2018 low could act as a magnet
After breaking the $50 per barrel level, the next significant technical support level in the NYMEX crude oil futures market stands at the December 2018 low.
(Source: CQG)
The weekly chart illustrates that while the price rallied to settle at over the $52 per barrel level, the decline to $49.31 was the lowest price since the week of January 7, 2019. Crude oil fell below its first level of technical support at $50.52, the early August low, and the next level on the downside stands at the December 2018 bottom of $42.36 per barrel. Even though crude oil bounced after probing below the $50 level, the energy commodity is not yet out of the bearish woods.
A low in February- March could be another story
The last significant bottom in the crude oil futures market occurred in February 2016.
(Source: CQG)
The monthly chart shows that the price of the energy commodity declined to $26.05 per barrel on the nearby NYMEX futures contract in February 2016. At that time, economic weakness in China and a realization that double-digit GDP growth was a thing of the past sent the oil market to the bottom. The winter months tend to be a period of seasonal weakness in the oil market as gasoline demand declines. At the same time, US production was rising, adding another level of selling to the oil market.
The current bearish price action in the oil patch has also been caused by Chinese economic weakness, this time because of the Coronavirus. Meanwhile, US output at 13 million barrels per day, according to the EIA, has caused an increase in inventories, which have swelled since October 2019. However, seasonality is likely weighing on the price of the energy commodity. With the spring only weeks away, the demand for gasoline should begin to increase, which could lift the price of oil futures. Moreover, the current low price level could cause OPEC to make more substantial production cuts over the coming weeks. The international oil cartel will meet in early March to re-evaluate its current production policy.
Iran continues to lurk in the background as a clear and present danger to world oil supplies. At the $50 per barrel level, I believe risk-reward favors the upside. If $49.31 is not the bottom for 2020, we may see another attempt that creates a slightly lower low. The December 2018 low may be a target for the price of the energy commodity, but I would use any price weakness as a buying opportunity over the coming days. A stop below $48 per barrel in nearby NYMEX futures will protect capital if Coronavirus escalates. I believe the market will not fall to a price that triggers the stop.
The United States Oil Fund LP (USO) was trading at $10.83 per share on Tuesday morning, down $0.12 (-1.10%). Year-to-date, USO has declined -9.83%, versus a 26.82% 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 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.