Crude Oil- Three Reasons the Odds Favor the Upside

• Falling US production and rig count
• The reaction to the tapering on July 15
• The trend is always your friend, and it is higher

The new active month September NYMEX crude oil futures fell to a low of $21.99 per barrel on April 22. Meanwhile, the expired May contract dropped below zero on April 20, reaching a record low of negative $40.32 per barrel. The lack of storage caused the landlocked crude oil to become a bearish hot potato as those holding long positions had nowhere to house the energy commodity.

Since then, the price has made an impressive comeback. September futures rose to a high of $42.51 per barrel on June 23 and has been consolidating around the $40 level. The price action filled the gap on the chart from March at $42.49 per barrel. Voids on charts tend to act as magnets for price action.

The crude oil price recovered by over $20 per barrel from the April low on the September futures contract. On the continuous contract, it rebounded by over $80 per barrel. As crude oil has been consolidating near the high since June, the energy commodity could be preparing for a move to even higher highs. The United States Crude Oil Fund (USO) follows the price of a portfolio of NYMEX futures contracts higher and lower.

Falling US production and rig count

Even though there was an uptick in daily US output over the past week to 11.1 million barrels per day, production is still over 15% lower than in March when it peaked at 13.1 mbpd. This week, inventories in the US rose as the EIA reported an increase of 4.9 million barrels, and the API said they rose by 7.544 million barrels. Product stockpiles were mostly lower for the week ending on July 17.

Baker Hughes said that the number of rigs operating in the US stood at 181 for the week ending on July 24 compared to 776 last year. When it comes to production around the world, OPEC, Russia, and other world producers will operate under a 7.7 million barrel per day production cut in August, down around two million from July, but a significant amount as global business activity continues to get back on track.

The reaction to the tapering on July 15

The first sign of strength in the oil market came after OPEC, Russia, and other world producers tapered the output cut to under eight million barrels per day. Crude oil held the $40 per barrel level on both nearby WTI and Brent futures.

Chinese demand for crude oil has been robust over the past months. At the same time, the decline in the value of the US dollar, the pricing mechanism for crude oil, provides some support for the price of the energy commodity.

Source: CQG

The weekly chart shows that the dollar index fell below its technical support level at 94.61 on July 23, which is a supportive factor for all commodity prices, including crude oil.

The trend is always your friend, and it is higher

On July 21, the price of nearby September WTI NYMEX futures reached a high of $42.51.

 Source: CQG

The daily chart illustrates that the most recent high finally closed the gap on the chart. The bottom end of the void from early March was at $42.49 per barrel.

Crude oil continues to make higher highs and higher lows after the price carnage in April. The technical support levels are $38.77, $$37.32, and $35.01 on the September contract.

Falling US output, the 7.7 mbpd production cut by OPEC, Russia, and other world producers, and the weak US dollar are why the trend in crude oil remained higher at the end of last week. Nearby September futures were trading at above the $41 per barrel level on July 24.

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The U.S. Oil Fund LP (USO) fell $0.14 (-0.48%) in premarket trading Monday. Year-to-date, USO has declined -71.17%, versus a 1.01% 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 #70 of 111 ETFs in the Commodity ETFs category.