Saturday, May 13th, 2017
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With confirmed break above $49/bbl (“heads”), crude will likely resume its uptrend.
With confirmed break below $47/bbl (“tails”), crude will likely begin a new downtrend.
In the short run, supply and demand is a mere headline and has little effect on price direction.
Last week, we outlined a bearish case for crude oil and the United States Oil Fund (NYSEARCA:USO). After a surprisingly bullish EIA report on Wednesday following only a mildly bullish API report on Tuesday evening, we have updated our near-term outlook to a coin flip. After the EIA report, we covered our short position and went long at $47/bbl and selling yesterday when the market appeared to be drifting back below $48/bbl.
We have shifted back to a long bias, based upon a belief that OPEC and other market makers have a vested interested in keeping the oil price higher, not only for the Saudi Aramco IPO scheduled for 2018, but also for the financial health of oil exporting countries worldwide. We have covered these issues in prior articles.
On the other hand, the market has been oversupplied with oil for more than two years. While there have been glimmers of hope for supply-demand re-balancing, oil supplies in the U.S. remain at all-time monthly highs. If the price of oil was in the $20s at lower inventory levels, who is to say that it cannot return there?
The USO ETF closely follows the front-month WTI crude oil futures contract on NYMEX, since it holds the front-month futures contracts as its primary asset. USO can be useful for short-term trading positions, but is not always a great candidate for “buy and hold” investors, due to time decay created by the normal structure of the futures market. We covered that briefly in an article that can be accessed here. We have updated our indicators for USO investment, and the above table summarizes our current outlook.