United States Oil (USO) – President Donald Trump pulled off an energy coup
In the midst of a pandemic, President Donald Trump pulled off an energy coup: He was able to convince the second and third largest crude oil producing countries to set their bickering aside and voluntarily cut production, at least for a couple of months. In so doing Trump may have saved global financial markets, the U.S. energy industry – and the U.S. economy.
Even the New York Times, no a friend of Trump or fossil fuels, conceded he “prodded” the oil nations to “reach a deal.”
Shayne Heffernan Trade Idea
“To prevent inventories reaching capacity limits, lower prices are needed to trigger further production shut-ins in North and South America.” “President Donald Trump is helping a lot of American business with simple commonsense” Shayne Heffernan PhD in Economics
Why This Matters
Since the early 1970s the Organization of the Petroleum Exporting Countries (OPEC), which is dominated by Saudi Arabia, has been the prime mover in world oil markets.
Russia, which for years was the second largest crude oil producer after the Saudis, has never been a formal member of OPEC. It’s played more of an observer role, but usually went along with OPEC actions. Usually, but not always.
This recent disagreement was a big one. The Saudis pushed for production cuts, but the Russians refused. In response, the Saudis said they would ramp up their production by some 3 million barrels per day, an action that tanked already depressed oil prices.
Since both countries depend heavily on oil revenue, the wounds were self-inflicted. But there has also been collateral damage: The United States.
Fifteen years ago, U.S. consumers might have cheered the rift – and the low gasoline prices. No more.
The United States has become the world’s largest crude oil and natural gas producer. Thanks to the fracking boom, oil production increased from about 5 million barrels a day in the mid-2000s to more than 13 million barrels a day last January.
Oil and natural gas production are major drivers of the U.S. economy. Without the fracking boom, the Great Recession that began in 2007 would have been longer and deeper. The energy industry was one of the few industries that thrived, putting the country back on its feet.
But U.S. oil and gas production come from private energy companies, not the government. If the companies get soaked, we all get wet.
For example, the energy industry supports more than 10 million U.S. jobs, including lots of highly paid, blue-collar workers. The coronavirus pandemic could reduce demand for oil by 50 percent, and many of those workers are being furloughed or terminated.
Those job loses will hit the energy-producing states especially hard.
In addition, many energy companies borrow money to finance their production efforts – just like companies in most other industries. If they can’t repay their loans, that will squeeze the banks and other lenders.
Plus lots of investors and pensions own energy company stocks. When the stock price sinks, those investors may get margin calls, forcing them to sell other assets – perhaps at rock bottom prices.
In other words, there are lots of downstream ripple effects from a global oil-price implosion.
Which is why it was important for Trump to get the Saudis and Russians back to the table. We don’t know all of the details, but the man who has long touted his deal-making ability pulled it off.
And here’s another important result: The deal relaxes some of the pressure on states and the federal government to take action.
Some have been calling on states to arbitrarily cap how much private sector oil companies can produce. While the intentions may have been good, pushing the government down this road is a terrible idea.
If states were to impose such legislation or executive orders, that could set a bad precedent – especially in blue states that want to curtail or eliminate fossil fuel production. They might set a production cap so low that energy companies would feel compelled to abandon their operations in that state.
The last thing we need is for politicians to get their foot in the oil industry’s C-Suite doors, determining how much a company can or cannot produce.
Yes, the COVID-19 pandemic will likely shutter many oil and gas producing companies – especially smaller and over-leveraged ones. That’s bad news, but their assets will likely be bought by financially stronger companies.
As states begin a phased-in process of heading back to work, people will need gasoline. Excess supplies could be used up fairly soon, allowing the energy companies to begin ramping up production once again.
The U.S. energy industry won’t recover overnight, but the Saudi-Russian deal, brokered by Trump, may mean we will still have an energy industry to revive.
Overall, the bias in prices is: Downwards.
Note: this chart shows extraordinary price action to the downside.
The projected upper bound is: 5.53.
The projected lower bound is: 2.63.
The projected closing price is: 4.08.
A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 3 white candles and 6 black candles for a net of 3 black candles. During the past 50 bars, there have been 21 white candles and 28 black candles for a net of 7 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 11.0294. This is an oversold reading. However, a signal is not generated until the Oscillator crosses above 20 The last signal was a buy 11 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 33.24. 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 10 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 -86. This is not a topping or bottoming area. The last signal was a sell 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 13 period(s) ago.
Rex Takasugi – TD Profile
UNTD ST OIL FUND closed down -0.150 at 4.210. Volume was 280% above average (trending) and Bollinger Bands were 37% narrower than normal.
Open High Low Close Volume 4.150 4.260 4.100 4.210 250,164,560
Technical Outlook Short Term: Oversold Intermediate Term: Bearish Long Term: Bearish
Moving Averages: 10-period 50-period 200-period Close: 4.94 7.41 10.72 Volatility: 126 142 80 Volume: 207,699,296 102,675,360 44,436,608
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 60.7% 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 65 periods. 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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