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Crude Oil: Up And Down And Going Nowhere

Business
Summary

Trading in a range.

A tightly coiled spring.

The trade war holds the key.

Oil-related equities lag the market.

UCO and SCO continue to offer an opportunity to grind profits.

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The price action in the crude oil market has reflected the bullish and bearish price forces that are pulling the price of the energy commodity in opposite directions. On days when the price is under pressure, it feels like it’s only a matter of time until oil will fall below the $50 per barrel level on the nearby NYMEX crude oil futures contract. On up days, $60 per barrel becomes a realistic target on the upside. However, anyone looking for a break to the up or the downside has been frustrated as the price has been reversing consistently. Trading rather than investing in the oil market has been the optimal strategy over the past month.

The prospects of a recession on the back of the trade war between the US and China remains a bearish factor for the oil market. Iran presents the potential for supply concerns, which supports the price. US output is negative while falling global interest rates that stimulate the economy are positive. Trading oil futures by buying on dips and selling on rallies has been the way to go in the energy commodity. For those who do not venture into the futures arena, the ProShares Ultra Bloomberg Crude Oil product (UCO) and its bearish counterpart (SCO) provide an alternative. The double-leveraged products have been useful tools to take advantage of the broad daily ranges and a market that has not yet decided if it’s a bull or a bear.

Trading in a range

The price of October crude oil futures on the New York Mercantile Exchange continues to trade in around the $10 range that has been in place since late May. While the price had been making lower highs since the April peak at the $66.60 level, it negated that pattern on Sept. 5.

Source: CQG

As the daily chart highlights, October futures were trading at around the $56 per barrel level on Sept. 6 after trading to a high at $57.76 on Sept. 5. The peak was above the most recent high at $57.40 in mid-August. Since falling to a low at $50.50 on August 7, the price has made higher lows and higher highs while remaining within the trading range.

Price momentum and relative strength have risen to slightly above neutral readings. At the same time, open interest has increased from 1.978 million contracts on August 23 to 2.079 million as of Sept. 5. When the metric that reflects the total number of open long and short positions moves higher with the price, it tends to be a technical validation of a bullish trend in a futures market.

Daily historical volatility at over the 36% level is the result of wide intraday trading ranges over recent weeks.

A tightly coiled spring

The trading band that contains the price of oil reflects the bullish and bearish factors that face the energy commodity. The longer that crude oil sits below $60 and above $50 per barrel, the more the spring will stretch, and the more violent the eventual move will be when crude oil decides on a direction. However, the price of the energy commodity could trade within its current range for an extended period.

While the price moved above the middle of the range last week, we are coming into a time of the year when oil prices often decline. During the winter months, gasoline demand tends to fall, putting pressure on the price of oil. Over the past two weeks, inventory reports have supported the price of the energy commodity. For the weeks ending on Aug. 23 and 30, the API reported a decline of 11.1 million barrels and a rise of only 401,000 barrels, respectively. The EIA data was more bullish with reductions of 10 and 4.8 million barrels for the two weeks. The API reported a decline in gasoline stocks of 349,000 and 877,000 barrels for the final two weeks of August. The EIA said they fell by 2.1 and 2.4 million barrels over the period. When it comes to distillate products, the API noted declines of 2.5 and 1.2 million barrels while the EIA said they dropped by 2.1 and 2.5 million barrels.

Baker Hughes noted that the number of rigs operating fell by 12 for the week ending on August 30, which was 120 below the same time in 2018. However, the latest EIA data on US production at 12.4 million barrels per day was only 100,000 barrels lower than the record level the week earlier. A falling rig count and higher production is a sign that output efficiency continues to improve in the US, the world’s leading producer of the energy commodity.

Oil production in the US will face a watershed event in the 2020 Presidential election. The reelection of the incumbent would continue the trend in US output. Meanwhile, the opposing party candidates that have adopted a “Green New Deal” would likely institute policies that deal with the carbon footprint and reduce oil production and consumption dramatically. In the short term, the ongoing trade war between the US and China is the most significant factor for the path of least resistance of the energy commodity.

The trade war holds the key

While the inventory data from the EIA provided some support for the price of oil on Sept. 5, news that the trade standoff between the US and China could thaw also pushed the energy commodity higher. Positive comments from China lifted the prices of the stock market and crude oil. The US and China are the most significant oil consumers in the world, and weakness in the Chinese economy has weighed on the price of oil. The rally on Sept. 4 that took the price of NYMEX futures over $2 per barrel higher came on the back of better-than-expected economic data from China.

Any further escalation of the trade war between the two countries with the world’s leading GDPs would likely weigh on the price of oil. A return of optimism over the potential for an agreement could ignite a rally. Over the coming weeks, news from Beijing and Washington over trade holds the key to the price direction of NYMEX futures. Bad news could send the price below $50, while a surprise agreement could launch a rally that would challenge the 2019 high at $66.60 per barrel. At the same time, Iran continues to be a factor that could cause supply concerns to return to the market in a blink of the eye.

Oil-related equities lag the market

At the end of 2018, the price of crude oil fell to a low at $42.36 per barrel before recovering. At $56 on Sept. 6, the price was 32.2% higher than the lows at the end of last year.

Source: CQG

The XLE holds shares many of the leading oil companies in the world. The Energy Select SPDR fell to a low at $53.36 in December 2018 and was trading at $58.96 on Sept. 6, a rise of 10.5% as oil-related shares underperformed the price of the energy commodity. At the same time, the S&P 500 SPDR rose from $233.76 to $298.31 over the same period or 27.6%. Shares of oil companies have underperformed both the price of oil and overall stock market since the late 2018 low.

Some sectors have done even worse. The OIH oil services ETF product traded to a low at $13.13 during the final week of 2018 and was at $12.30 on Sept. 6, over 6% lower over the same period.

Oil companies have lagged the stock market and the price of crude oil, which is a warning sign for the price of the energy commodity.

UCO and SCO continue to offer an opportunity to grind profits

With bullish and bearish factors pulling on the crude oil futures market, the current range could remain in place for the rest of 2019. When oil is rallying, it looks like that price is heading for a break above the $60 level, but that has been the perfect time to sell. When the price is falling to the bottom end of its range, it looks like it is heading for a test of the 2018 low. The bearish sessions in the futures market have been the ideal time to buy.

The most direct route for a risk position in the crude oil market is via the futures and futures options that trade on the NYMEX or ICE exchanges. For those who do not venture into the futures arena, the ProShares Ultra Bloomberg Crude Oil product (UCO) and its bearish counterpart (SCO) are tools that capture the daily price moves on NYMEX futures with double leverage.

The most recent top holdings of UCO include:

Source: Yahoo Finance

UCO has net assets of $351.88 million, trades an average of 3.9 million shares each day, and charges a 0.95% expense ratio. The product creates leverage through its holdings of futures and swap contracts. The price of October NYMEX crude oil rallied from $52.84 to $57.76 from Sept. 3 through the 5, a rise of 9.3%.

Source: Barchart

Over the same period, UCO moved from $15.65 to $18.63 or over 19% as the product produced double the percentage gain as the futures market.

The most recent top holdings of SCO include:

Source: Yahoo Finance

SCO has net assets of $85.78 million, trades an average of over 2.3 million shares each day, and charges a 0.95% expense ratio. SCO also creates leverage through its holdings of futures and swap contracts. The price of October NYMEX crude oil fell from $56.89 to $52.84 from Aug. 29 through Sept. 3, a decline of 7.1%.

Source: Barchart

The chart shows that over the same period, the SCO product rose from $16.53 to $18.93 or 14.5% as it delivered twice the percentage performance on the downside in the oil market.

If the price of oil remains active in its $50 to $60 trading range, selling rallies scale up above $55 and buying scale downs below the midpoint would create optimal returns. The UCO and SCO products could be the perfect tool to take advantage of the price action in the oil market over the coming weeks and perhaps months.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

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11 Comments on "Crude Oil: Up And Down And Going Nowhere"

  1. ANAL REAPER on Mon, 9th Sep 2019 12:35 pm 

    The only thing going up and down is my COCK

  2. Dredd on Mon, 9th Sep 2019 12:38 pm 

    “Crude Oil: Up And Down And Going Nowhere”

    Crude is as crude does (A Falsified Oil-Qaeda Hypothesis Spreads).

  3. juan paultard madness on Mon, 9th Sep 2019 2:51 pm 

    “ANAL REAPER said The only thing going up and down is my COCK”

    juanpaultard, get help you sexual deviant. FUCK NUT

  4. Davy Socks on Mon, 9th Sep 2019 3:52 pm 

    juan paultard

    ANAL REAPER

  5. Davy Official on Mon, 9th Sep 2019 5:55 pm 

    I am a Sock Puppet

    Hear me Roar

    Keepin’ it real for my Sock Peeps.

  6. Davy Official on Mon, 9th Sep 2019 5:57 pm 

    “The only thing going up and down is my COCK”

    Corrected Version:

    “The only thing going up and down is my little peepee in my hand.”

    Keepin’ it REAL and DEEP.

  7. JuanPaultard madness on Mon, 9th Sep 2019 6:29 pm 

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    Davy Socks said juan paultard ANAL REAPER

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  8. Davy on Mon, 9th Sep 2019 9:15 pm 

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  10. juan paultard madness on Tue, 10th Sep 2019 4:41 am 

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    Reply to delusional Americans said Theedrich: Your country is occupying a foreign nat…
    juanPaultard madness said Davy on Mon, 9th Sep 2019 6:49 pm
    Davy said Oops, sorry for getting all triggered and losing m…
    Osama bin Laden said “My objective is to engage the United States…

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