On July 7, in a Barchart article on the quarterly action in the energy sector, I outlined the four reasons to “expect higher energy prices in the second half of 2023.” The four factors supporting rising oil prices were:
- Crude oil continues to power the world. China and India, the world’s most populous countries, are less concerned about climate change than the U.S. and Europe.
- OPEC+’s mission is higher petroleum prices, and the cartel’s output is the critical supply factor.
- The U.S. SPR is at a four-decade low, and the Biden administration has missed many opportunities to purchase oil at its $67-$72 per barrel target.
- China and other BRICs countries have begun pricing crude oil in non-dollar assets, which could lift the energy commodity’s dollar price.
Since the end of Q2, nearby NYMEX WTI and Brent crude oil futures have rallied, and the bullish trend looks set to continue.
A significant rally in WTI and Brent
Nearby September WTI crude oil futures have rallied steadily since the end of Q2.
September NYMEX crude oil futures rose from $70.78 on June 30 to the latest $82.67 high on Friday, August 4.
October Brent futures rose from$75.30 on June 30 to an $86.25 high on August 4.
Saudi Arabia extended its production cuts through September, putting upward pressure on crude oil prices as OPEC+ continues to follow a policy path leading to higher prices. Moreover, the ongoing war in Ukraine makes crude oil supplies an economic weapon for the Russians, who are the cartel’s most influential non-member.
A missed opportunity
In October 2021, the Biden Administration posted a Fact Sheet informing that it intended to purchase crude oil barrels to replace the Strategic Petroleum Reserve sales at a target level of $67 to $72 per barrel. After Russia invaded Ukraine and oil prices soared, the administration authorized the sale of an unprecedented amount of petroleum from the SPR that dropped from over 600 million barrels in late 2021 to 346.8 million barrels, the lowest level in four decades.
The five-year continuous contract chart of WTI NYMEX crude oil futures shows that prices were within the range or below the low end of the target from March through June 2023. However, the administration continued to sell SPR stockpiles.
While there were plans for the first six-million-barrel purchase in August, crude oil prices rallied above the top end of the target range. The administration withdrew its offer to purchase the six million barrels in early August, leaving the SPR dangerously low.
The bottom line is the administration should have taken advantage of its opportunity to bolster reserves. With Saudi Arabia continuing its production cuts, Russia using petroleum as an economic weapon, and the U.S. a lurking buyer below $72 per barrel, the potential for even higher oil prices is a clear and present danger in August 2023.
The technical levels to watch
The trend in any market is always your best friend and the path of least resistance of oil prices has turned higher since the end of Q2.
The ten-year chart highlights the first technical resistance level in NYMEX crude oil futures at the April 2023 $83.53 high, only 58.0 cents above the August 4 $82.95 peak. Above there, the November 2022 $93.74 high is the next technical upside target. Fundamental support is at the $67 to $72 U.S. government buying range, with technical support at the May 2023 $63.57 low. A break above $83.53 would end the pattern of lower highs and lower lows since the March 2022 $130.50 high and could cause a significant wave of technical trend-following buying in the crude oil futures arena.
The ten-year chart highlights the first technical resistance level in NYMEX crude oil futures at the April 2023 $83.53 high, only 58.0 cents above the August 4 $82.95 peak. Above there, the November 2022 $93.74 high is the next technical upside target. Fundamental support is at the $67 to $72 U.S. government buying range, with technical support at the May 2023 $63.57 low.
A break above $83.53 would end the pattern of lower highs and lower lows since the March 2022 $130.50 high and could cause a significant wave of technical trend-following buying in the crude oil futures arena.
USO tracks WTI futures in the short-term
The most direct route for a risk position in the crude oil market is via the highly liquid NYMEX WTI or ICE Brent futures and futures options contracts. Since the May lows:
- NYMEX crude oil futures rallied 30.5% from $63.57 to $82.95 per barrel.
- Brent crude oil futures rose 26.8% from $68.20 to $86.49 per barrel.
At $74.21 per share, the U.S. Oil Fund (USO) had over $1.486 billion in assets under management. USO trades an average of nearly 2.3 million shares daily and charges an 0.81% management fee.
USO tracks WTI crude oil prices and has moved 24.2% higher from $59.78 in May to $74.27 per share on August 4.
BNO tracks Brent futures in the short-term
At $29.43 per share on August 4, the U.S. Brent Oil product (BNO) had nearly $176.5 million in assets under management. BNO trades an average of 383,214 shares daily and charges a 1.09% management fee.
BNO tracks Brent crude oil prices and has moved 22.5% higher from $24.02 in May to $29.43 per share on August 4.
The USO and BNO ETFs reasonably track the two leading crude oil benchmarks, but they are only appropriate for short-term risk positions. Term structure or the forward oil curve can be highly volatile, causing distortions in the ETFs. Meanwhile, a bullish breakout in oil prices will likely cause upward momentum to continue in USO and BNO, which are alternatives to the futures arena.
Crude oil is a highly political commodity that continues to power the world. The geopolitical landscape continues to support higher highs in oil prices, with the U.S. SPR’s low level providing a potential floor for the coming months.
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.
