Crude Oil Recovers From the Precipice

• A technical break- The next level of support is critical

• Demand continues to be the markets’ primary concern- Seasonality weighs on the price

• Three reasons why crude oil came storming back from a higher low

After reaching an all-time low in the NYMEX WTI futures market and fell to the lowest level of this century in the Brent futures on the Intercontinental Exchange, the price recovered. Both WTI and Brent futures rose above the $40 per barrel level, where they spent months consolidating. After an elevator ride to the downside, the energy commodity took a slow staircase higher.

The price of nearby October NYMEX futures hit rock bottom at $23.26 on April 22. It first recovered to $40 on June 5 and continued to make higher lows and higher highs until August 26 when the price reached $43.78 per barrel. On September 4, the price slipped below the $40 per barrel level for the first time since July 31, but it returned to above that level at the end of last week.

Crude oil has not taken the elevator to the downside yet, but the memories of the price carnage from February through April remain in the minds of market participants. The price of crude oil failed after a four-month recovery but the moved was a head fake. Bullish and bearish factors are pulling the energy commodity in opposite directions. It feels like we may have seen the bottom in the recent correction, and there are compelling reasons why crude oil moved higher after the bearish period that ended with a higher bottom. The United States Crude Oil Fund (USO) tracks the price of NYMEX futures.

A technical break- The next level of support is critical

After making high lows and higher highs from late April through late August, crude oil corrected lower in early September.

Source: CQG

As the daily chart of October NYMEX futures highlights, September’s price action interrupted the bullish price pattern. The price of crude oil fell to a low of $36.13 on September 8 but was back above the $40 level at the end of last week. The October contract remained above the $39 level from June 30 through September 8.

The next level of critical technical support in the crude oil market stands at the June 12 low of $35.25 per barrel. A move below that level could open a floodgate of technical selling. However, the short-term move sent crude oil into an oversold condition that resulted in a higher low.

Demand continues to be the markets’ primary concern- Seasonality weighs on the price

The price carnage in the crude oil market that took nearby NYMEX WTI futures to a price below zero in April and Brent futures to the lowest price of this century came on the back of the evaporation of demand. As businesses closed, people sheltered in place, and life came to an unprecedented halt because of the spread of coronavirus, the demand for energy disappeared.

OPEC, Russia, and other world producers addressed the fundamental changes in the petroleum market with an unprecedented 9.7 million barrel per day production cut. As the price moved back over the $40 per barrel level, the group tapered the cut to 7.7 mbpd, where it remains. In the US, the low price led to an output decline from a record 13.1 mbpd in March 2020 to the 10.9 mbpd level as of the week ending on September 11. According to Baker Hughes, the number of oil rigs operating in the US fell from 719 to 179 over the past year as of September 11.

While adjustments in supplies provided some balance to crude oil’s fundamental equation, the demand side will drive the price action over the coming weeks and months. The requirements for petroleum will be a function of the state of the global pandemic over the fall and winter months.

Meanwhile, crude oil is moving into a time of the year when demand tends to fall naturally. Gasoline requirements tend to decline during the winter season, which often weighs on the price of the oil product and its input, crude oil.

Three reasons why crude oil came storming back from a higher low

When crude oil fell below the $40 per barrel level, the memories of price carnage in April are lifting bearish sentiment. However, three significant factors support the price of the energy commodity as we move towards the end of 2020.

The dollar remains the benchmark pricing mechanism for crude oil and most commodities. A falling dollar tends to support prices.

Source: CQG

As the weekly chart of the US dollar index illustrates, it has been falling since March 2020 and broke below its technical support level at the September 2018 low of 93.395. At the end of last week, the index remained below that level, which is bullish for commodity prices, and crude oil is no exception.

The second supportive factor is the tidal wave of central bank liquidity and government stimulus in 2020. The unprecedented flow is inflationary, and the Fed recently told the world it is prepared to tolerate inflation above the 2% target rate.

Finally, producers worldwide have already demonstrated a commitment to support the crude oil price via production cuts. Moreover, the Middle East remains an arena of the world that could cause price spikes if Iran begins to act up over the coming weeks or months.

I believe that crude oil will make a higher high over the coming weeks and months. The recent move in the oil market reflected concerns that a significant resurgence of coronavirus will cause another spike lower. Like in late April, that would likely be another compelling buying opportunity in the energy commodity that powers the world.

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The United States Oil Fund (USO) was trading at $28.22 per share on Monday afternoon, down $0.84 (-2.89%). Year-to-date, USO has declined -72.46%, versus a 2.10% 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 #66 of 112 ETFs in the Commodity ETFs category.