After falling to $63.64 per barrel in May 2023, the continuous NYMEX WTI crude oil futures contract rallied to $95.03 in September, where they ran out of upside steam. In an October 4 Barchart article, I wrote, “The odds favor a continuation of the rally in oil, putting more upward pressure on inflation.” The nearby December NYMEX contract settled at the $82.55 per barrel level on October 4. While it rallied to just below $90 on October 20, the price turned lower and was around $82 per barrel on November 6.
The prospects for higher oil prices remain a clear and present danger over the coming months. The Bloomberg Ultra Crude Oil 2X ETF product (UCO) turbocharges crude oil’s performance on the upside, but the leverage erodes its value when the energy commodity moves lower or remains stable.
NYMEX crude oil holds the early October low
Active month December NYMEX crude oil prices reached $92.48 per barrel on September 28, when it ran out of upside steam.
The chart highlights the 12.7% decline to $80.10 per barrel on November 3. The price fell marginally below the October 6 $80.20 low in December futures.
The U.S. SPR remains low, with the DOE looking to replace the reserves
On Monday, October 30, the U.S. Strategic Petroleum Reserve stood at 351.3 million barrels, unchanged over the past four weeks and at the lowest level in four decades. In late 2021, the SPR was over the 600-million-barrel level. The Biden administration sold an unprecedented amount from the SPR to cap oil prices when they rose above $130 per barrel in early 2022 in response to Russia’s invasion of Ukraine.
While the sales helped to push NYMEX futures to below $64 per barrel in May 2023, crude oil recovered over the past months. In October 2022, the Biden Administration issued a fact sheet stating “its intent to use SPR repurchases to add to global crude oil demand when the price of West Texas Intermediate (WTI) crude oil is at or below about $67 to $72 per barrel.”
Meanwhile, nearby NYMEX crude oil prices fell into and below the stated range in December 2022 and March, May, June, and July 2023. The administration sold over 250 million barrels in 2022 and 2023 but only managed to repurchase four million barrels during the five months when the price was within or below its target range.
The lack of buying means the administration has less ammo to cap prices if they surge over the coming months.
War in the Middle East is not bearish
The October 7 terrorist attack in Israel ignited a war with Hamas. Hamas receives support from Iran, and with U.S. support for Israel, the odds of an escalation and significant war in the Middle East are the highest in years.
The U.S. SPR remains at a forty-year low with a smoldering disaster in the Middle East. The administration may look back at oil prices within and below its target $67 to $72 range as a missed opportunity.
The last major war in the Middle East involving Israel was in 1973. U.S. support led to the 1973-1974 oil embargos that quadrupled the price from $2.90 to $11.65 per barrel. Some analysts believe crude oil is on the verge of a significant rally. Last week, Bank of America cautioned “that any retaliation against Teheran could risk the passage of vessels through the Strait of Hormuz, a vital channel considered to be the world’s most important oil transit chokepoint. If the strait is closed, oil prices can spike above $250 per barrel.”
Oil is an economic weapon
OPEC countries have lined up against Israel and the United States. Moreover, Russia, the top non-member that cooperates with the cartel’s production quotas, has used oil and energy commodities as economic weapons against “unfriendly” countries, supporting Ukraine.
Saudi Arabia, the UAE, Iran, Iraq, Kuwait, and other OPEC members could use petroleum as an economic bomb against the United States and its allies supporting Israel. It is in the cartel’s and Russia’s best interests to sell half the number of barrels at $160 than the current number at $80 per barrel.
According to the U.S. Energy Information Administration, U.S. daily production climbed to 13.2 million barrels per day for the week ending on October 20, 2023. However, climate change policies under the Biden Administration have limited the output potential. The U.S. consumes an average of around twenty million barrels daily, meaning OPEC+ tremendously influences global prices with its production policies.
Saudi Arabia requires $80 per barrel to balance its domestic budget. Increasing military expenditures will likely increase the level. Russia is funding its war in Ukraine with commodity revenues. Iran requires higher prices to support Hamas, Hezbollah, and its military infrastructure. The bottom line is higher oil prices favor OPEC+ at the expense of the U.S. and its allies.
UCO is a turbocharged trading product that requires attention to risk-reward dynamics
Crude oil near the $80 per barrel level could be a golden buying opportunity. The most direct route for a risk position in crude oil is via the WTI futures and futures options on the CME’s NYMEX division and the Brent futures and futures options on the Intercontinental Exchange.
The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) track the prices of the two leading oil benchmark futures prices. The Bloomberg Ultra Crude Oil 2X ETF (UCO) leverages the USO and WTI oil prices. At $32.56 per share on November 6, UCO had nearly $641.5 in assets under management. UCO trades an average of over three million shares daily and charges a 0.95% management fee.
The last rally in nearby NYMEX December crude oil futures took the price 12% higher from $80.20 on October 6 to $89.85 per barrel on October 20.
Over the same period, UCO rallied 22% from $29.82 to $36.37 per share. UCO’s leverage means it outperforms NYMEX crude oil on the upside, but it will underperform if prices remain stable or fall as it suffers from time decay. Moreover, UCO does not trade when the U.S. stock market is not operating, so it can miss highs or lows during off hours. Time and price stops and discipline are required for success with all leveraged products that are only appropriate for short-term trading.
Crude oil has declined to a level that could be compelling, given the geopolitical landscape. UCO is a tool that will turbocharge rallies.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
