United States Oil (USO) Investors Remain Skeptical
Investors have abandoned oil at warp speed so far this year as futures prices have fallen to record lows. Even as oil has bounced from its record trough in April, investors remain skeptical about the chances for sustained value appreciation.
Shayne Heffernan Trade Idea
“We expect oil will provide a net drag on overall U.S. GDP growth of roughly 0.25 percentage points, year over year.” Shayne Heffernan PhD in Economics
- “While this would normally represent a meaningful drag on growth, in the current environment oil is unlikely to be a major factor for overall growth.”
Why This Matters
Typically, oil price fluctuations have a small aggregate impact on US growth, with roughly offsetting effects from the energy capex and consumption channels.
- However, the sharp rise in the likelihood of bankruptcies in the energy sector and spending constraints due to the virus suggest that the decline in oil prices might be a larger drag on growth this time.
The big picture
The U.S. is now the world’s No.1 oil producer, which means more of the economy is dependent on oil and gas production.
What happened: Energy saw the biggest change in positioning of all market sectors, as traders sold nearly 80 million shares of energy stocks during the first quarter, Bank of America Global Research notes. That put energy’s relative weight in overall fund holdings at its second-lowest level in the bank’s data history, dating back to 2008.
- Hedge funds sold oil at an even more extreme pace and held record underweights at the end of the first quarter.
What to watch
Oil’s historically low prices mean that more bankruptcies are “likely unavoidable,” Shayne Heffernan. Heffx estimates currently imply “a 50-60% year-on-year decline in energy capex in Q2/Q3, similar to the decline in 2015/2016.
- In addition to the increased bankruptcies, that will likely also mean more debt and less investment for the companies that are able to survive, meaning sustained fundamental weakness in the sector.
Overall, the bias in prices is: Downwards.
Note: this chart shows extraordinary price action to the downside.
By the way, prices are vulnerable to a correction towards 39.14.
The projected upper bound is: 32.19.
The projected lower bound is: 8.48.
The projected closing price is: 20.33.
A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 18 white candles and 31 black candles for a net of 13 black candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 74.4218. This is not an overbought or oversold reading. The last signal was a sell 1 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 35.03. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 3 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 55. This is not a topping or bottoming area. The last signal was a buy 7 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 4 period(s) ago.
Rex Takasugi – TD Profile
UNTD ST OIL FUND closed up 1.000 at 21.470. Volume was 25% below average (neutral) and Bollinger Bands were 10% wider than normal.
Open High Low Close Volume 21.080 21.670 20.660 21.470 10,523,513
Technical Outlook Short Term: Neutral Intermediate Term: Bearish Long Term: Bearish
Moving Averages: 10-period 50-period 200-period Close: 19.45 39.78 80.09 Volatility: 130 174 95 Volume: 19,013,708 22,581,940 8,030,934
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
UNTD ST OIL FUND is currently 73.2% below its 200-period moving average and is in an downward trend. Volatility is high as compared to the average volatility over the last 10 periods. Our volume indicators reflect very strong flows of volume out of USO (bearish).
Our trend forecasting oscillators are currently bearish on USO and have had this outlook for the last 80 periods. Our momentum oscillator has set a new 14-period high while the security price has not. This is a bullish divergence.
We invite you to try out any MetaStock product (including Add-Ons) for 30 days. If you are not convinced that it helps you make more accurate, educated trading decisions, just return it to us within the 30 days for a refund of the purchase price. It’s that simple. This policy does not apply to subscriptions.