Can Crude Oil Reach $100 Again?

• The world’s leading producer hands the pricing baton to its old foes

• OPEC+’s mission is the highest possible price

• The trend is higher

• The world continues to depend on the fossil fuel

• A demand surge could be explosive- Bull markets tend to exceed expectations

The last time NYMEX crude oil futures traded above the $100 per barrel level was 2014, when the energy commodity reached a high of $107.73. Since crude oil futures began trading on the CME’s NYMEX division in 1983, the price was above the century mark in five years out of thirty-eight. The all-time came in 2008 at $147.27 per barrel. From 1983 through 2004, the high was $41.15.

2020 was a wild year in the crude oil market. Energy demand evaporated as the global pandemic descended on the world. Crude oil fell steadily from a high of $65.65 in early January through April, but the real fireworks came on April 20 when the price declined below zero for the first time and fell to a low of an incredible negative $40.32 per barrel. A pipeline in Cushing, Oklahoma, is the delivery point for NYMEX WTI futures, making it a landlocked crude oil. As demand disappeared, petroleum filled storage capacity. As the May contract moved towards expiration, those holding long positions had nowhere to store the oil, forcing longs to sell at any price. Since then, crude oil has climbed steadily, reaching the highest price in over a year last week.

Supply fundamentals are undergoing a significant change in 2021, which could put the $100 level back within reach for only the sixth time in almost four decades. The United States Crude Oil Fund (USO) holds a portfolio of NYMEX crude oil futures contracts.

The world’s leading producer hands the pricing baton to its old foes

In March 2020, US petroleum production reached an all-time peak of 13.1 million barrels per day. The global pandemic that caused the oil price to plunge led to a decline in US output. Meanwhile, other leading producers, Saudi Arabia and Russia, together with OPEC members, slashed production to balance the global oil market’s supply and demand equation.

The change in US administrations caused a substantial shift in energy policy. On his first day in office, President Joe Biden canceled the Keystone XL pipeline project that brings petroleum from the oil sands in Alberta, Canada, to Steele City, Nebraska. More regulations are on the horizon in the US, which translates to falling production. As of February 5, daily US output stood at 11 million barrels per day, a 16% decline from the high. Production is not likely to return to the previous high as the US takes a greener path towards energy production and consumption.

Meanwhile, vaccinations are likely to bring an end to the global pandemic over the coming months. As the world emerges from the threat to the economy created by the coronavirus, people will begin traveling, and energy demand will increase. We could see a sudden surge in crude oil demand over the coming months. For decades, US energy policy worked to achieve energy independence from the Middle East and Russia. The shift in policy could hand the pricing power back to OPEC+ over the coming months and years.

OPEC+’s mission is the highest possible price

OPEC is the international oil cartel. Starting in 2016, when the oil price dropped below $30 per barrel, the cartel worked with Russia to establish an output policy. The Russians saw a window of opportunity to influence the crude oil price by cooperating with the other leading world producers, sans the United States. Moreover, President Vladimir Putin likely viewed cooperation with OPEC as an opportunity to increase his sphere of influence in the Middle East. Through his oil minister, Alexander Novak, President Putin positioned a bridge between Iran and Saudi Arabia, OPEC members, and mortal enemies in the region. Since 2016, the Russians have approved and participated in production decisions. OPEC has not made a move without Russian involvement.

OPEC’s website states:

“In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

The bottom line is that OPEC’s mission is to maintain a production policy that creates the highest return for its members. The shift in US policy only supports OPEC+’s mission to increase the oil price. According to analysts at Goldman Sachs, Saudi Arabia’s breakeven price to balance its budget in 2021 is $66 per barrel. The Brent price recently moved over the $60 per barrel level. When it comes to the Saudis and the Russians, the higher the oil price, the better.

The trend is higher

After a correction to a low of $33.64 per barrel in early November 2020, crude oil’s price has been on the stairs higher.

Source: CQG

As the chart highlights, last week, nearby NYMEX crude oil futures traded to a high of $59.82 per barrel. The next upside target above the $60 psychological level is at $65.65 per barrel, the 2020 peak. Above there, the 2018 high at $76.90 would become the next technical target for the energy commodity. A move above there would create a multi-year breakout with $100 per barrel within reach.

As the monthly chart shows, the spike lower in April 2020 created a significant bottom in the oil futures market. Price momentum and relative strength indicators are rising towards overbought readings in the long-term chart. The metrics can remain at an overbought condition for extended periods. The total number of open long and short positions in the oil futures market has been rising with the price of the energy commodity, which tends to validate a bullish trend in a futures market. Open interest has risen from just over two million contracts to 2.471 million contracts as of the end of last week. Monthly historical volatility declined from over 120% in 2020 to below 93%. Daily historical volatility dropped to the 20.32% level at the end of last week. The measure of price variance has been trending lower as crude oil’s price continues to take a staircase to the upside.

The world continues to depend on the fossil fuel

Despite the shift in US energy policy, hydrocarbons continue to power the world. While that may change in the years ahead, the pandemic’s end will increase the demand for crude oil products like gasoline and distillates.

China and India are the world’s most populous countries, and both consume oil and oil products. In the US and Europe, most automobiles, trucks, and other transportation modes rely on crude oil for power. Last week, General Motors told the world it would shift from gasoline-powered vehicles to EVs by 2035, but that is fourteen years away. Over the coming months and years, crude oil will continue to power the world.

A demand surge could be explosive- Bull markets tend to exceed expectations

The aftermath of COVID-19 could create a demand surge in the oil market. Saudi Arabia and Russia control OPEC, and both producers would rather sell less oil at higher prices than more oil at lower ones. The US policy shift will make OPEC+’s decisions far more significant for the price of the energy commodity.

As a sign of its increasing influence, a surprise additional one million barrel per day production cut from Saudi Arabia in January helped push the oil futures price higher. The Saudis and Russians may have dipped a toe into the oil market to watch the price action after the announcement. The results handed the oil-producing countries information that they now have far more control than in the past years.

As we learned on April 20, 2020, when nearby NYMEX futures moved below zero and Brent futures fell to the lowest level of this century at $16 per barrel; bear markets tend to send prices to levels that are far below expectations. Bull markets often do the same on the upside. The current trend in crude oil is higher. The energy commodity has not traded above the $100 level since 2014, and many analysts have forecast that we will never see that level again. However, if last year taught us anything, it is never to say never.

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The United States Oil Fund (USO) was trading at $40.22 per share on Tuesday morning, up $0.28 (+0.70%). Year-to-date, USO has gained 21.84%, versus a 5.40% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #71 of 112 ETFs in the Commodity ETFs category.