- Lower volatility in 2019 than the previous year
- Trade and OPEC cuts set the stage for higher prices
- US politics could drive the price
The price of crude oil will finish 2019 a lot closer to the top than the bottom end of its trading range for the year. The crude oil market has undergone significant changes over recent years. The growth of US output has made the nation the world’s leading oil-producing nation. After decades of reliance on the Middle East, energy independence has come from technological advances that lowered the cost of production. At the same time, regulatory reforms under the Trump Administration has allowed oil to flow without prior restrictions. The Energy Information Administration recently reported a new high in US output at 12.9 million barrels per day. At that level, US production exceeds Saudi Arabia and Russia.
When it comes to the international oil cartel, the growth of US output has depleted OPEC’s influence on world oil prices. Russia became a leading force within OPEC since 2016 when the price dropped to just over $26 per barrel. Since then, the Russians have participated in production cuts and have had a say in output policy. 2020 could be a volatile year for the energy commodity. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) are the ETF products that track the prices of the two benchmarks for crude oil around the globe.
Lower volatility in 2019 than the previous year
In 2018, nearby NYMEX crude oil futures traded in a range from $42.36 to $76.90 per barrel. In the year that ends this Tuesday, the trading band has been from $44.35 to $66.60 per barrel. A higher low and lower high reflects the price consolidation in the energy commodity. Meanwhile, the low came during the first week of 2019 this year, and WTI futures traded mostly between $50 and $60.
(Source: CQG)
The weekly chart highlights that at $61.72 per barrel last Friday, crude oil is ending this year near the top end of the trading range. Price momentum and relative strength indicators are rising towards overbought readings. Weekly historical volatility at 21.65% is closer to the low than the high end of its band. Since crude oil tends to take the stairs higher and an elevator shaft to the downside, the grind to the upside caused the measure of price variance to decline.
Meanwhile, the total number of open long and short positions in the NYMEX futures market ended 2018 at 2.105 million contracts. The metric was slightly higher on December 26 at 2.126 contracts. The rise of 21,000 is marginal.
Many analysts are bullish for the prospects of the energy commodity going into 2020. I am bullish on volatility, as I believe we will see a wider broader range during the first year of the new decade.
Trade and OPEC cuts set the stage for higher prices
China is a significant consumer of energy, and crude oil powers the world. The trade war between the US and China in 2019 was a reason for price weakness at times. When the trade war escalated in early August, the price of oil dropped to the low end of the range as it traded to a bottom of $50.52 per barrel. The announcement of the “phase one” trade deal in December provided support for the price of oil futures. If progress on trade stabilizes the Chinese economy, it translates to more a robust demand for crude oil.
The trade war was one of the reasons for the OPEC increase in the production cut from 1.2 to 1.7 million barrels per day on December 6. The Saudis added another 400,000 barrels of cuts to bring the total to the 2.1 million barrel level. However, the move by the Saudis was likely related to its IPO of Aramco. Saudi Arabia brought shares of its state oil company and the crown jewel of the Saudi royal family public on its local exchange at a $1.7 trillion valuation in the aftermath of the OPEC meeting. OPEC will re-evaluate the production cut in early March, which could add volatility to the market during the first half of 2020.
US politics could drive the price
Meanwhile, the US election in November 2020 will likely serve as both a referendum on President Trump’s performance and the futures of energy policy in the world’s leading producer of crude oil. The Energy Information Administration said that US production stood at 12.9 million barrels per day for the week ending on December 20, a record high.
The Trump administration has been highly supportive of oil and gas output. Regulatory reforms since 2017, together with technological advances in extracting fossil fuels from the crust of the earth, have made the US the world’s leading producer of both oil and natural gas. Meanwhile, the shift to the left in the opposition party means that the Democrat’s platform will include the “Green New Deal.” More regulations, higher corporate taxes, and a shift towards alternative sources of energy could cause the US dominance in the market to decline starting in 2021 if the Democrat’s nominee defeats President Trump in the election.
Uncertainty surrounding the future of US oil and gas production is likely to cause price volatility in the oil futures market increase, perhaps dramatically, during the second half of the new year. For many years, oil prices have driven political decisions in the US. However, in 2020, it could be politics that drive the price of the energy commodity, which is likely to begin to move with the political polls as the election approaches.
The United States Oil Fund LP (USO) was trading at $12.81 per share on Wednesday afternoon, down $0.08 (-0.62%). Year-to-date, USO has gained 6.66%, versus a 21.09% 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.