USO: The Technical Trend in Oil is in Jeopardy

We will hear from OPEC
The technical trend remains bullish
The risk rose with the price – Inventories and production are rising in the US

The price of NYMEX and Brent crude oil futures have been making higher lows and higher highs since October 3, when the WTI January futures fell to a low at $50.69 per barrel. The price of oil fell to the early October low after selling it the market when oil spiked higher following the drone attack that temporarily took out half of Saudi Arabia’s production in mid-September.

Crude oil has traded in a narrower range in 2019 than in 2018. Last year, WTI futures hit a high at $76.90 in October and then fell to a low at $42.36 per barrel in late December. This year the trading band has been between $44.35 at the start of 2019 and a high at $66.60 per barrel in April. So far, the fourth quarter of 2019 has been the complete opposite of the price action during the prior year. At the end of last week, the price of the energy commodity fell sharply threatening the bullish price pattern.

The United States Oil Fund (USO) tracks the price of NYMEX WTI futures, while the United States Brent Oil Fund (BNO) follows Brent futures that trade on the Intercontinental Exchange.

We will hear from OPEC

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The biannual OPEC meeting is this Thursday and Friday, December 5 and 6. At the end of last week, nearby Brent crude oil futures were trading at around the $64 per barrel level, which is in the middle of the desired range for the cartel. Before the last OPEC meeting in early July, some of the oil ministers said the sweet spot for the price of the energy commodity is between $60 and $70 per barrel. However, Brent futures spent lots of time below the low end of the range over the past six months.

OPEC will likely extend the 1.2 million barrels per day output cut into 2020, and there is a small chance the cartel could increase the level of quotas above that level. Russia will once again play a significant role in the production policy, and the statement will hit the market on December 6 after the member and nonmember summit. The OPEC meeting should keep a bid under the already bullish oil market this week.

The technical trend remains bullish

The price action in the NYMEX WTI futures market has been bullish since early October.

(Source: CQG)

The daily chart of January futures shows that the price rose from $50.69 on October 3 to a high of $58.74 on November 22, an increase of 15.9%. At under $55.50 per barrel on Friday, November 29, the price of oil was threatening to break below its first level of support at the November 20 low of $54.85 per barrel. Price momentum and relative strength indicators had risen with the price but crossed lower at the end of last week. While relative strength is below a neutral reading, price momentum crossed to the downside in overbought territory. Open interest, the total number of open long and short positions, has increased from 2.033 million to 2.196 million contracts since late October. Rising prices and increasing open interest tend to be a technical validation of a bullish trend in a futures market. Crude oil will need to hold the $54.85 level on January futures to avoid technical selling.

The risk rose with the price- Inventories and production are rising in the US

A critical factor to keep in mind is that crude oil production data from the US is not supportive of further price gains. Last week the API and EIA reported that crude oil inventories rose by 3.639 and 1.60 million barrels, respectively. Increases in gasoline stockpiles were even higher, with gains of 4.378 million and 5.10 million barrels. The API said distillate stocks fell by only 665,000 barrels, while the EIA reported an increase of 700,000 barrels for the week ending on November 22.

Moreover, the EIA said that daily production rose to a new record level of 12.9 million barrels per day. The United States remains the world’s leading producer with significantly more daily output than both Saudi Arabia and Russia.

The price of crude oil corrected from the high end of its trading range as flows from the US weighed on the market. The technical trend is in jeopardy as the market waits for news from OPEC later this week.

USO shares were trading at $11.63 per share on Tuesday morning, down $0.04 (-0.34%). Year-to-date, USO has gained 20.39%, versus a 25.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...