A New Milestone For Crude Oil

In early June, in a piece about the NYMEX crude oil market on Barchart, I wrote, “A move to the $100 level is not a fantasy given the price action in the commodity asset class and other markets.” In that article, I highlighted the price action in the S&P 500 Energy Sector SPDR (XLE) trading at the $54 level on June 2, with July crude oil futures at $68.83 per barrel.  On June 11, the XLE was higher at $55.38, with July NYMEX crude oil at just below $71 per barrel. 

The energy commodity continues to climb a bullish staircase of higher lows and higher highs, with the XLE moving higher as traditional energy-related companies benefiting from the rise in prices. The trend looks set to continue over the coming weeks and months. 

While the XLE is a pick-and-shovel play on the petroleum market, other stock market tools follow the price of NYMEX futures more directly and offer leverage for short-term traders. The most direct route for a risk position in the NYMEX oil market is via the futures and futures options trading on the CME’s NYMEX division. The Ultra DJ-UBS Crude Oil ProShares product (USO) and its bearish counterpart (SCO) are liquid trading instruments on the stock market that offer market participants the opportunity to participate in the oil market without venturing into the futures arena. 

Crude oil rises to the highest price since October 2018

Crude oil made an incredible comeback from the April 20, 2020, negative $40.32 per barrel spike on the nearby NYMEX futures contract. The energy commodity spiked lower during the height of the pandemic, and it has rallied steadily over the past fourteen months. 

The chart illustrates oil’s bullish trading pattern, taking it to a new high of $71.24 on Friday, June 11, the highest price since October 2018. The upside technical target now stands at that month’s peak at $76.90 per barrel. 

Inflationary pressures support the energy commodity

Last week, the latest consumer price index told us that inflation rose by 5% in May. Core inflation, excluding food and energy, was 3.8% higher, the most substantial increase in nearly three decades. The Fed has been encouraging inflation to rise ever since it shifted its target from 2% to an average of 2% last August. Along with a tidal wave of central bank liquidity and quantitative easing to the tune of $120 billion per month, the US government has unleashed a tsunami of fiscal stimulus, spending trillions over the past year, with more on the horizon. Over the past weeks, copper, lumber, and palladium prices rose to new record highs. Grains and many agricultural commodities reached multi-year peaks. The stock market is in record territory, and digital currency volatility has been wild after parabolic moves to record levels in the stratosphere. Real estate prices are soaring, as are most other asset and input prices. The Fed may call the spike in inflation “transitory,” but anyone running a business or individuals shopping for essentials are experiencing some of the most substantial price hikes since the 1970s. 

Crude oil is a leading commodity and an input as the traditional energy commodity powers the world. Rising inflation that erodes the purchasing power of fiat currency is bullish for the oil price. 

US energy policy is fuel on a bullish fire

If rising inflation is not enough, the shift in US energy policy to address climate change creates a nearly perfect bullish storm for the oil market. As vaccines create herd immunity to COVID-19, energy demand has exploded. 

On his first day in office, President Joe Biden canceled the Keystone XL pipeline project that carried petroleum from the oil sands in Alberta, Canada, to Steele City, Nebraska, and beyond to the NYMEX delivery point in Cushing, Oklahoma. Recently, the President banned drilling and fracking on federal lands in Alaska. As the Saudi oil minister said at a recent OPEC meeting, “drill-baby-drill is dead in the US.” 

In March 2020, US petroleum production rose to a record 13.1 million barrels per day. As of June 4, the Energy Information Administration reported that US daily output was 16% lower at 11 mbpd. Baker Hughes told the oil market that 365 oil rigs were operating as of June 11, 166 higher than last year at this time. However, the output is around the same level. On June 5, 2020, the US average output stood at 11.1 mbpd. Increased regulations under the current administration have caused production to decline, handing oil’s pricing power back to the international oil cartel and Russia.  

Bull markets rarely move in a straight line- A technical target could be the gateway to triple-digit crude oil prices

Central bank and government monetary and fiscal policies are creating an inflationary fire. US energy policy is weighing on output at a time when energy demand is soaring. People are returning to work and consuming more gasoline. They are taking long-overdue, post-pandemic vacations, increasing the demand for gasoline and jet fuel. The stimulus is causing a buying bonanza, increasing energy demand for trucks and other transportation modes bringing products to markets. Moreover, rising commodity prices cause producers to increase output. Crude oil, oil products, and energy are critical inputs in commodity production worldwide. 

Crude oil is not the only energy commodity rallying. Ethanol, a biofuel blended with gasoline in the US, is trading at its highest price level since April 2014. Last week, nearby natural gas futures rose to a new high for 2021. One year ago, in late June 2020, the nearby natural gas futures price fell to a twenty-five-year low at $1.432 per MMBtu. It settled at $3.296 on Friday, June 11. 

Crude oil is approaching a critical technical level. A move above could trigger a tidal wave of buying. 

The long-term chart shows that the $76.90 2018 high is a gateway to the 2014 high at over $100 per barrel. 

In April 2020, visions of a triple-digit oil price were a fantasy as the price fell way below zero. In June 2021, it is a reality. 

Even the most aggressive bull markets rarely move in a straight line. Corrections are part of the game. A bull market in crude oil will occasionally suffer setbacks, as we witnessed in March when the price fell below the $60 level before rallying to over $70 per barrel. 

UCO and SCO are short-term trading tools for those that do not venture into the futures arena

The most direct route for a risk position in crude oil is via the futures or futures options that trade on the CME’s NYMEX division or the Intercontinental Exchange for the Brent benchmark. The Ultra DJ-UBS Crude Oil ProShares product (USO) and its bearish counterpart (SCO) provide an alternative for those wishing to participate on the long and short sides of the crude oil market without venturing into the futures arena. 

The latest rally in crude oil took the price of nearby NYMEX futures from $61.56 on May 21 to $71.24 on June 11, a 15.7% rise. 

Around the same period, UCO rose from $57.63 to $73.53 per share or 27.6%, as it delivered a leveraged return compared to the futures market. UCO has $1.23 billion in assets under management, trades an average of 849,555 shares each day, and charges a 0.95% management fee. The bearish SCO product has $70.2 million in assets, trades over one million shares on average each day, and charges the same 0.95% expense ratio. 

Crude oil reached a new milestone last week when it rallied to the highest price since October 2018. A move over the high from that month could open a door for a move back to triple-digit prices, a level not seen since 2014. 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.