United States Oil (USO) – OPEC cuts fail to end the panic
The coronavirus pandemic has caused oil demand to drop so rapidly that the world is running out of room to store barrels. At the same time, Russia and Saudi Arabia flooded the world with excess supply.
That double black swan has caused oil prices to collapse to levels that make it impossible for US shale oil companies to make money. US crude for May delivery turned negative on Monday — something that has never happened since NYMEX oil futures began trading in 1983. It was easily the oil market’s worst day on record.
US crude for June delivery is still trading above $20 a barrel — but even that’s disastrous.
Shayne Heffernan Trade Idea
It’s not unusual to see volatility in prices, especially the day before a contract expires. However, nothing compares to Monday’s downturn.
“We saw the first close into negative territory, ever. We saw the biggest one-day percentage drop, ever. We saw our biggest dollar drop in one day, and our lowest close ever.”
“Fortunately, the more actively traded June contract is actually trading for about $20 a barrel. Oil will recover” Shayne Heffernan PhD in Economics
Why This Matters
Many oil companies took on too much debt during the good times. Some of them won’t be able to survive this historic downturn.
In a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. At $10, there would be more than 1,100 bankruptcies, Rystad estimates.
At $10, almost every US E&P company that has debt will have to file Chapter 11 or consider strategic opportunities.
OPEC cuts failed to end the panic
The most stunning part of the record low in oil prices is that it comes after Russia and Saudi Arabia agreed to end their epic price war after President Donald Trump intervened. OPEC+ agreed to cut oil production by a record amount.
Trump said the OPEC+ agreement would save countless jobs and much-needed stability to the oil patch.
“This will save hundreds of thousands of energy jobs in the United States,” Trump tweeted on April 12. “I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia.”
Yet crude has kept crashing, in part because those production cuts don’t kick in until May. And demand continues to vanish because jets, cars and factories are sidelined by the coronavirus pandemic.
The hope in the oil industry is that Monday’s negative prices are somewhat of a fluke caused by the rolling over futures contracts.
The record low in the May contract comes on very thin trading volume ahead of Tuesday’s expiration. That’s because there are concerns that there will be no room to store those barrels delivered in May. The June contract, however, only dropped around 10% to $22 a barrel. And Brent crude, the world benchmark, fell just 5% to $26.50 a barrel.
Still, oil contracts roll over each month and they don’t crash to record lows.
“There will be a lot of companies that don’t survive this downturn,” said Ryan Fitzmaurice, energy strategist at Rabobank. “This is one of the worst on record.”
‘Unprecedented’ stress in the oil industry
Signs of stress abound in the oil patch.
The S&P 500’s energy sector has lost more than 40% of its value this year — despite the dramatic rebound in the overall stock market over the past month.
Noble Energy, Halliburton, Marathon Oil and Occidental have all lost more than two-thirds of their value. Even Dow member ExxonMobil is down 38%.
Whiting Petroleum became the first domino to fall when the former shale star filed for Chapter 11 protection on April 2. But it certainly won’t be the last.
Rystad’s $20 scenario predicts more than $70 billion of oil company debt will get reorganized in bankruptcy, followed by $177 billion in 2021. And that only accounts for exploration and production companies, not the servicing industry that provides the tools and manpower to drillers.
The key will be how long oil prices stay dirt cheap. A rapid rebound in prices could allow many oil companies to avoid bankruptcy.
Overall, the bias in prices is: Downwards.
Note: this chart shows extraordinary price action to the downside.
The projected upper bound is: 5.06.
The projected lower bound is: 2.16.
The projected closing price is: 3.61.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 2 white candles and 7 black candles for a net of 5 black candles. During the past 50 bars, there have been 20 white candles and 29 black candles for a net of 9 black candles.
A falling window occurred (where the bottom of the previous shadow is above the top of the current shadow). This usually implies a continuation of a bearish trend. There have been 14 falling windows in the last 50 candles–this makes the current falling window even more bearish.
A long upper shadow occurred. This is typically a bearish signal (particularly when it occurs near a high price level, at resistance level, or when the security is overbought).
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
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 10.0000. This is an oversold reading. However, a signal is not generated until the Oscillator crosses above 20 The last signal was a buy 12 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 29.91. This is where it usually bottoms. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 11 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 -126.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a sell 8 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 14 period(s) ago.
Rex Takasugi – TD Profile
UNTD ST OIL FUND closed down -0.460 at 3.750. Volume was 1,060% above average (trending) and Bollinger Bands were 29% narrower than normal.
Open High Low Close Volume 3.760 4.050 3.700 3.750 875,230,528
Technical Outlook Short Term: Oversold Intermediate Term: Bearish Long Term: Bearish
Moving Averages: 10-period 50-period 200-period Close: 4.73 7.27 10.68 Volatility: 85 145 81 Volume: 272,631,296 119,659,992 48,714,312
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 gapped down today (bearish) on heavy volume. Possibility of a Breakaway Gap which usually signifies the beginning of a major market move. Four types of price gaps exist – Common, Breakaway, Runaway, and Exhaustion. Gaps acts as support/resistance.
UNTD ST OIL FUND is currently 64.9% below its 200-period moving average and is in an downward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect moderate flows of volume out of USO (mildly bearish). Our trend forecasting oscillators are currently bearish on USO and have had this outlook for the last 66 periods. Our momentum oscillator is currently indicating that USO is currently in an oversold condition. The security price has set a new 14-period low while our momentum oscillator has not. This is a bullish divergence.
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