Crude Oil Rises Above Another Technical Level

• Crude oil takes out a technical resistance level on the weekly chart

• The factors that point to higher

• The threats that could create a selloff

• Bulls are winning, but it will be a bumpy road higher

At this time in 2020, crude oil was on a path to a price below zero for the first time on the NYMEX crude oil futures market. The energy commodity began last year with a high at $65.65 per barrel as the US and Iran faced off in Iraq. The Iranians retaliated against the US after the killing of a top Iranian general. The situation calmed, and oil began to decline. By the end of January, nearby futures closed at $51.63. On the final day of February, the price had dropped to $45.26, and the last session of March closed at $20.10. On April 20, crude oil was over $60 lower at negative $40.32 and closed the month at the $19.09 level.

Since those four months of price carnage, the energy commodity recovered, rallying in seven of the last nine months. At the end of January 2020, the price was sitting at $52.14 per barrel, and the trend remained higher. Since the week of January 11 through the end of last month, nearby NYMEX futures had sat in a tight range from $51.44 to $53.93 per barrel. Last week, the petroleum futures in the US eclipsed a technical target. The crude oil futures market has gone into a coma as bullish and bearish factors pull it in opposite directions. The United States Crude Oil Fund (USO) holds a portfolio of NYMEX futures.

Crude oil takes out a technical resistance level on the weekly chart

Since early November, when nearby NYMEX crude oil futures corrected to $33.64 per barrel, the price steadily climbed higher. On February 2, Groundhog Day, the energy commodity rose to a one-year high as it surpassed the peak from the week of February 18, 2020.

Source: CQG

As the weekly chart highlights, technical resistance stood at $54.50 per barrel. On February 2, NYMEX futures rose to a high of $55.26, which was a technical breakout. The total number of open long and short positions in the NYMEX crude oil futures market rose from 2.054 million during the week of November 16 to 2.459 million contracts at the end of last week as the price increased. Rising open interest as the price appreciates is typically a technical validation of a bullish trend in a futures market.

Price momentum and relative strength metrics are sitting in overbought territory at the end of last week. Weekly historical price volatility at 28.8% reflects the steady nature of the rally. Crude oil has been taking the stairs higher since early November over the past three months. Nearby March futures settled at $56.85 on February 5, just under the high for last week at $57.29 per barrel.

The factors that point to higher

Three significant factors are pushing crude oil higher.

• Optimism that the world is coming close to the end of the global pandemic is increasing the energy demand.

• The tidal wave of central bank liquidity, low-interest rates, and government stimulus are inflationary. The economic condition eats away at fiat currencies’ values, which is bullish for all commodity prices, and crude oil is no exception.

• A decline of US fossil fuel production under the Biden administration will reduce supplies in the near term while the world continues to depend on petroleum as an energy source. Moreover, the US’s shift towards a greener path hands the pricing power in the oil market back to Saudi Arabia, Russia, and other OPEC members and world producers.

Fundamentals are mostly bullish for crude oil, and the trend remains higher as of the end of the first week of February 2021.

The threats that could create a selloff

Three factors could derail the current rally in the crude oil futures arena:

• Bubblicious activity in the stock market could weigh on crude oil as stocks and the energy commodity tend to have a high correlation.

• COVID-19 continues to infect people worldwide as cases rise along with fatalities. New strains of the virus could be resistant to current vaccines. The pandemic continues to have the potential to weigh on the global economy.

• Crude oil has a long history of taking the stairs higher and an elevator shaft to the downside during corrections. The potential for a correction rises with the price. The continuous contract has risen from $33.64 in early November to $57.29 last week, or over 70%.

Bulls are winning, but it will be a bumpy road higher

The technical trend in the crude oil futures arena, together with supply and demand fundamentals, created the environment that took the energy commodity’s price above a technical resistance level last week. The next critical upside target stands at the 2020 high of $65.65 per barrel. Crude oil futures would likely run into some congestion at the psychological $60 level.

The bullish trend in the oil market is entering its fourth month. While the energy commodity continues to take the stairs higher, the risk of a correction will continue to increase with the price. I remain bullish on crude oil but will raise stops on long positions as the price continues to grind higher.

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The United States Oil Fund (USO) was trading at $38.53 per share on Monday morning, up $0.34 (+0.89%). Year-to-date, USO has gained 16.72%, versus a 4.10% 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 #72 of 112 ETFs in the Commodity ETFs category.