Will Crude Oil Prices Continue to Gain Momentum?

• New highs on most days since late April
• US production has declined steadily since mid-March, and other world producers reduced output- A gap in the weekly chart
• Continued signs of demand in crude oil could keep the bullish party going

April 20 was the day when nearby NYMEX crude oil futures traded below zero for the first time. Under two months later, the price was approaching $40 per barrel. The $80 per barrel swing in the price of the energy commodity in seven weeks is enough to make even the most seasoned trader’s head spin.

Crude oil fell, as did U.S. Oil Fund LP (USO), as a tidal wave of petroleum hit the market when demand evaporated as the global pandemic spread like wildfire around the globe.

Declines in output from all of the leading producing countries and increasing demand from China and the US as social distancing guidelines ease has caused a steady rise in the price of petroleum. The price has moved higher over the past six consecutive weeks.

The price volatility in the energy commodity reminds us that the cure for low prices in raw material markets is low prices. When a commodity declines to a level that does not support production, output falls. When demand begins to climb, the price bottoms. Inventory decreases can lead to significant gains as production cannot keep pace. The low price of crude oil in April was a blow-off low in the energy commodity that could lead to even higher prices over the coming weeks and months. A gap on the weekly chart could act as a magnet for the price of NYMEX futures.

New highs on most days since late April

After trading to a low of $17.27 on April 27, the active month July NYMEX crude oil contract has taken a steep staircase to the upside. The path down was in an elevator shaft.

(Source: CQG)

 The elevator shaft took the price $94.82 per barrel low from mid-February to mid-March.

(Source: CQG)

At the end of the first week of June, the price of July futures has rallied over $22 from the April 27 low. The price action was filling the gap between $37.64 to $41.88 from early March. July NYMEX futures settled at $39.55 per barrel, near the high, on Friday, June 5.

US production has declined steadily since mid-March, and other world producers reduced output- An OPEC meeting last week

In mid-March, US petroleum production reached a record high of 13.1 million barrels per day. According to the Energy Information Administration, it had declined to 11.2 million at the end of May. At the end of last week, Baker Hughes said that 206 oil rigs were operating in the US. At the same time in 2019, 789 rigs were pumping the energy commodity from the earth’s crust.

In April, OPEC, Russia, and other world producers agreed to reduce output by 9.7 mbpd for at least two months. As of June 1, Saudi Arabia added another million barrels to the daily production, and other Middle Eastern producers also reduced output. Last week, OPEC and Russia seemed ready to extend the output cuts for another month until demand returned to a level where the market achieves a fundamental balance.

Continued signs of demand in crude oil could keep the bullish party going

The Chinese economy has improved, businesses are operating, and energy demand has increased. The US is still coming out of social distancing guidelines, but civil unrest is delaying parts of the economy.

This summer, people in the US will begin to venture out if the recent protests and violent outbursts end. The demand for gasoline will rise after evaporating over the past months. The decline in production should begin to reduce inventories of oil and oil products.

In the oil market, demand is the most significant factor. While the world focuses on the recent civil upheaval in the US, Iran may decide it is the perfect time to lash out as sanctions continue to choke its economy. Any hostilities that impact the production, refining or logistical routes in the Middle East could cause sudden and violent rallies in the crude oil market as the demand begins to rise.

April 20 taught us to expect the unexpected in the crude oil market. We should not forget the lesson as the energy commodity has a long history of surprises on the downside and the upside.

When commodity markets reach highs or lows, high prices create market tops, and low prices cause bottoms.

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The United States Oil Fund LP (USO) was trading at $28.43 per share on Monday afternoon, down $0.44 (-1.52%). Year-to-date, USO has declined -72.26%, versus a 0.70% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #64 of 112 ETFs in the Commodity ETFs category.