Crude oil remains the fossil fuel that provides energy to people worldwide. On March 20, 2023, I outlined The Reasons Under $70 per Barrel is a Bargain for Crude Oil. That day, the nearby NYMEX crude oil futures contract was at the $66.16 per barrel level. After trading to a low of $64.12, the continuous contract rallied and was above $80 on April 3.
While up until recently, the trend remained bearish with lower highs and lower lows since the March 2020 $130.50 high, crude oil could be on a path that will challenge and potentially end its downside trajectory.
On March 20, I highlighted the Ultra Bloomberg Crude Oil 2X ETF (UCO), a product that turbocharges NYMEW crude oil’s upside performance. UCO was at the $21.48 per share level in late March and has climbed over the past weeks.
The short-term trend turns higher
Nearby NYMEX crude oil futures have made lower highs and lower lows since trading at the highest price since 2008 at $130.50 per barrel in March 2022. The war in Ukraine caused the upside price spike, which ran out of steam at just over the $130 level.
The chart highlights the bearish pattern over the past year that took WTI crude oil futures 50.9% lower from the March 2022 $130.50 high to the March 2023 $64.12 low.
Meanwhile, the U.S. SPR sales that took the reserves from around the 595-million-barrel level in early 2022 to 371.6 million barrels as of March 24 weighed on petroleum prices. The Biden administration sold from the SPR to push prices lower and control inflation and had stated it would replace the sold barrels at $70 and below. Crude oil hit its most recent low during the week of March 20, and while the administration has not yet reported any buying, the price action implies substantial support below the $70 level.
The two-year chart illustrates the bounce that took crude oil prices from the March 20 $64.12 low to over $80 per barrel on April 3.
$80.94 was the first target
The two-year chart shows that while crude oil remains in a bearish trend, the upside target to negate the adverse price action stood at the $80.94 per barrel level, the March 7 high. Crude oil exploded higher to $81.69 on April 3 after OPEC surprised the market with a more than one million barrel per day production cut.
The three-year chart illustrates above $80.94, there is minor technical resistance at $82.64, the late January 2023 high. Above there, resistance is in the $90s.
The oil market is entering the peak U.S. driving season, where gasoline demand increases, supporting higher crude oil prices. Moreover, the world’s most populous country with the second-leading economy has been positioning its diplomacy to secure future crude oil supplies.
Chinese growth and expansion are bullish for petroleum prices
As China emerges from its COVID-19 protocols, the demand for all raw materials will likely increase, and crude oil is no exception. While U.S. SPR sales controlled oil prices over the past months and pushed them lower, concerns about the Chinese economy were another fundamentally bearish factor.
China’s recent deals with Saudi Arabia and Iran and its “no-limits” alliance with Russia put the significant oil consumer in a position to influence crude oil production.
Source: Statista
The chart shows that while the U.S. is the world’s leading crude oil-consuming country, China is a close second. Chinese economic growth will pressure the demand side of crude oil’s fundamental equation.
Crude oil remains an economic weapon for Russia and OPEC
Chinese diplomacy, establishing close ties with Russia, Saudi Arabia, and Iran place China in a pivotal position as OPEC+’s leading customer. The cartel’s Joint Monitoring Committee (JMMC) met on April 2 and cut production by over one million bpd, surprising market participants who rushed to purchase oil, pushing the nearby NYMEX futures price over $80 per barrel for the first time since early March. Over the past years, production decisions have been a function of negotiations between Riyadh, Saudi Arabia, and Moscow. While Russia is not an OPEC member, the Russians are the +, as they have cooperated with and driven output decisions since 2016.
The continuing war in Ukraine has caused Russia to use crude oil, gas, and other commodities as economic weapons against “unfriendly” countries supporting Ukraine. Russia, the Saudis, and Iranians are likely selling oil to China at below-market prices while working to keep international prices at high levels to punish the U.S., Western Europe, Japan, and other countries that have sanctioned the Russians.
Russia stated its oil production declined by 500,000 barrels per day in March. OPEC+ then added to the output cut, igniting the rally to over the $80 per barrel level.
Seasonality favors the upside and more gains in UCO
While seasonality in spring and summer favors the upside in crude oil, OPEC+ production policy, Russia’s intent to punish its enemies with high prices that increase inflation, Chinese economic growth, and U.S. energy policy and the need to increase the SPR from the lowest level since late 1983 create a potent bullish cocktail for the crude oil prices.
On March 20, I wrote about the Ultra Bloomberg Crude Oil 2X ETF (UCO) at $21.48 per share. Nearby NYMEX May crude oil futures have risen from a $64.36 low on March 20 to $80.30 on April 3, a 24.8% price increase.
Over the same period, UCO rallied from a $20.96 low to $28.96 high, or 38.2%. While UCO did not deliver twice the percentage gain, it outperformed the May crude oil futures. Time decay over the past weeks ate away at some of UCO’s value as the leverage comes at a cost.
I believe crude oil found a bottom at under $65 per barrel, and the energy commodity’s fundamentals will continue to support gains over the coming weeks and months. Technically, a move above $82.64 will validate the fundamental case and could cause another significant price spike higher. On Monday, April 3, crude oil was back in bullish mode.
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.
