USO: Oil stuck in a beach. Identification of key prices to watch (NYSEARCA: USO)
It’s make or break crude oil time. Do you think that’s too dramatic? I will state the case here momentarily, but the United States Oil Fund (NYSEARCA:USO) is a popular vehicle for trading short-term moves in WTI crude oil.
ETF Energy Select Sector SPDR (XLE) is currently beating USO by the most since the start of the year. Who is right ? Stock traders or commodity traders? I argue that keeping tabs on what’s going on with oil is the smart game right now.
XLE beats USO in the last two months
According to USCF Funds, USO is an exchange-traded security whose shares can be bought and sold on the NYSE Arca. USO’s investment objective is that the daily percentage changes in the net asset value (NAV) of its shares reflect the daily percentage changes in the spot price of light sweet crude oil delivered to Cushing, Oklahoma, as measured by daily changes in the benchmark oil futures contract.
Black gold has been below its 200-day pivotal moving average for a few weeks now, and we are approaching the height of hurricane season. Previously, a series of tropical systems in the Gulf of Mexico could cause serious reductions in domestic oil production. In recent years, however, ample supply has meant that temporary offshore production halts meant little increase in the price of WTI in the first month. It could be different this year now that the supply and demand situation is much more bullish (as evidenced by a shifted futures curve).
Unfortunately for bulls, the tropics are incredibly calm considering the time of year. NOAA and Colorado State University had predicted one of the most active tropical Atlantic hurricane seasons on record, but warmer-than-expected eastern Pacific waters and a series of Saharan dust storms majors left the tropic’s primary developmental region (MDR) as silent as a mouse. over the past month. In fact, it’s one of the longest stretches without a named tropical storm in the past 30 years.
Control over the tropics: no serious GoM threats on the horizon
Far from the weather, the backwardness in the term structure of oil is a bullish factor to take into account. Forwarding occurs when near-date contracts are more expensive than later-date contracts. You might be thinking, “But doesn’t that mean the market is bearish since it expects cheaper prices to come?” I say “no” because it is more of an indicator of a bullish supply/demand balance, putting upward pressure on the market. While the WTI term structure has flattened out a bit, I still consider this a bullish signature.
WTI bullish pullback
As a technician, I like to monitor what is happening with both charts and seasonal trends. According to Equity Clock, WTI tends to peak for the year until mid-October. Thus, the next two months are generally not the ideal time to take a medium-term bullish stance on oil. Seasonality, however, is only a secondary indicator to what is most important: price.
Oil seasonality: stable until October
Here’s how I see the market technically right now: we are indeed in no man’s land. WTI (which should be how you analyze the US oil market, not the USO directly) has remained below its fixed 200-day moving average since the calendar flip in August. It is bearish.
But bulls point to how well oil’s first month held its November 2021 highs near $85 in a recent pullback. This is a key location that WTI must defend. I would be bullish on Oil above the mid $90s and would suggest short trades if we see Oil moving below $85.
WTI Crude Oil 2-Year Technical Chart: Watch for a Breakout or Breakout
Bonus topic: gas prices
Pivoting oil and where the USO might be headed, everyone wants to know where pump prices are going. RBOB gasoline futures, which can be traded through the UGA ETF, appear to have attracted buyers into the high $2s. That means the national average retail pump price could bottom around $3.90. There is usually a 90 cent spread on RBOB at which the national gas price average arrives after a few weeks lag. According to Bank of America Global Research, factors contributing to a higher spread over the years include higher regulatory and input costs, higher taxes and, more recently, seasonality.
RBOB-Retail Pump Price Variance History