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Oil is taking the stairs higher
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Iran and OPEC could send nearby NYMEX futures for a test of $60 per barrel
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Is there another elevator ride to the downside coming?
Crude oil continues to be the energy commodity that powers the world. Last year at this time, the price of oil was falling like a stone. The nearby NYMEX futures fell from $76.90 per barrel in early October 2018 to a low at $42.36 in late December. In 2019, crude oil has not returned to test the 2018 highs or lows as the trading range narrowed.
After falling to a low at just under the $50 per barrel level in early October, the price of the energy commodity has been moving slowly and steadily higher. On Friday, November 15, the price of the energy commodity settled at the $57.72 per barrel level after making a new short-term high at $57.97 on the final session of the week. The nearby December futures contract had not traded at that peak since September 24 when the oil market was on its way down from the spike after the drone attack on Saudi oilfields. The United States Oil Fund (USO) tends to replicate the price action in NYMEX oil futures on a short-term basis.
Oil is taking the stairs higher
On October 3, the price of December NYMEX crude oil futures fell to a low at $50.89 per barrel.
(Source: CQG)
As the daily chart shows, December futures have been making higher lows and higher highs over the past six weeks. Crude oil is taking the stairs to the upside, which could be a sign of danger for the energy commodity. Price momentum has risen into overbought territory, and the relative strength indicator is heading in the same direction. Daily historical volatility at 17.76% at the end of last week is at its lowest level since May. Meanwhile, the total number of open long and short positions has been rising with the price since the end of October as the metric has climbed from 2.033 to 2.163 million contracts. Rising price and increasing open interest is typically a bullish sign in a futures market.
Iran and OPEC could send nearby NYMEX futures for a test of $60 per barrel
Two factors could send the price of nearby NYMEX futures over the $60 per barrel level over the coming weeks. US sanctions on Iran continue to choke the Iranian economy. While there have been no provocative incidents impacting the oil market in the Middle East since the mid-September drone attack on Saudi production, that could change in the blink of an eye. At the same time, the December 5 and 6 OPEC meeting could cause the price of oil to rise if the cartel decides that the current 1.2 million barrel per day production cut is not enough in the current environment.
Moreover, a “phase one” deal between the US and China on trade could ignite the global economy as it would remove one of the issues that threaten a recession. Meanwhile, when the price of oil takes the stairs to the upside slowly, I always get concerned that the next shoe to drop could lead to an elevator ride back down to the $50 level or lower.
Is there another elevator ride to the downside coming?
We have learned that one message on twitter could change the tone of markets and turn optimism into pessimism in a nanosecond. The last example came on August 1. The Fed had cut interest rates for the first time in years on July 31. A dovish shift in monetary policy in the US should be supportive for commodity prices, and crude oil is no exception. However, when President Trump became frustrated with the pace of trade negotiations with the Chinese and their backtracking on a deal, he slapped new tariffs on China escalating the trade war. The price of December crude oil futures closed at $57.83 on July 31 and fell to a low at $53.61 per barrel on August 1 in the aftermath of the protectionist move. The price made its way to a low at $50.33 per barrel on August 7 after China retaliated.
Crude oil has been drifting higher, and lots of factors support a move to above the $60 per barrel level. However, whenever oil crawls higher, the risk of a swift correction tends to rise. Tight stops on any long positions in the oil market could protect capital in the event of a tweet or incident that suddenly causes the bottom to fall out under the price of the energy commodity.
The United States Oil Fund LP (USO) was trading at $11.87 per share on Monday afternoon, down $0.21 (-1.74%). Year-to-date, USO has declined -1.17%, versus a 17.36% 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.