2023-11-16 12:09:46 ET
Summary
- Oil prices plunged from over $95 to below $75 on the NYMEX futures contract.
- The U.S. administration's target buying zone for crude oil is at or below $67 to $72 per barrel.
- The OPEC+ meeting in late November may result in production cuts due to economic concerns and geopolitical tensions.
On Friday, October 6, 2023, the day before the horrific terrorist attack in Israel, nearby NYMEX December WTI crude oil futures (CL1:COM) fell to an $80.20 per barrel low. When the market reopened on Sunday, October 8, the war in the Middle East caused the energy commodity futures to gap higher. The December contract peaked at just below $90 per barrel on October 20, when it ran out of upside steam.
Like a game of musical chairs, market participants rushed into the crude oil futures arena, buying contracts because of the war. While the war continued, the bullish music stopped in the oil market, and prices turned lower. Over the past week, the price plunged as disappointed buyers turned sellers, sending the December futures below $75 per barrel, the lowest price since late July 2023.
The reasons for buying crude oil remain compelling in mid-November 2023. Crude oil is on sale at below $75 per barrel and trending lower, and the potential for another rally is high.
Leverage is a tool that requires care and discipline. The ProShares Ultra Bloomberg Crude Oil ETF ( UCO ) is a product that can enhance profits when oil prices move higher, but it quickly loses value when prices fall or remain stable. The case for a long position in UCO is compelling at the current price level, as the potential for rewards outweighs the downside risks.
Oil prices plunge from over $95 to below $75 on the nearby NYMEX futures contract.
The oil futures market had been under pressure before the tragic events of October 7, 2023.
The December NYMEX crude oil futures chart shows the 46.8% rally that took the energy commodity from $63 on May 4 to $92.48 per barrel on September 28. A correction took the energy commodity to an $80.20 low on October 6 as seasonality during the winter, and other economic factors weighed on the crude oil futures price.
As war broke out in the Middle East, crude oil gapped higher, with the December contract rising to $89.85 on October 20, where it ran out of upside steam. No upside follow-through took the price to below $74 on November 16 as disappointed longs liquidated risk positions.
Crude oil moves toward the U.S. administration’s target buying zone.
Over a year ago, the White House released a “ Fact Sheet ” stating its plans for the Strategic Petroleum Reserve. After falling from over 600 million barrels in late 2021, the Fact Sheet told the oil market, “ The Administration is announcing its intent to use SPR repurchases to add to global crude oil demand at times with the price of West Texas Intermediate ((WTI)) crude oil is at or below about $67 to $72 per barrel. ”
The weekly chart of nearby NYMEX WTI crude oil futures shows the price was above the administration’s target range in October 2022. However, it fell within or below the range in December 2022 and March, May, June, and July 2023.
Meanwhile, the Strategic Petroleum Reserve ("SPR") stood at 351.3 million barrels as of November 10, with only four million barrels repurchased. The SPR remains over 40% below the November 2021 level at the lowest in four decades. With crude oil below the $75 per barrel level in mid-November 2023 and trending lower, the potential for U.S. purchases is high after missing the opportunity to add to the reserves earlier this year. U.S. purchases could put a floor under the oil futures market over the coming weeks and months.
OPEC+ meeting in late November- Russia and Saudi Arabia need higher prices and will cite Chinese economic concerns for production cuts.
The international oil cartel will meet in its biannual gathering on November 26, 2023. Russia has cooperated with OPEC production quotas over the past years with output decisions as a function of negotiations between Riyadh, Saudi Arabia, and Moscow.
With crude oil prices below $80, OPEC+ will likely extend to increase production cuts later this month. Saudi Arabia requires $80 per barrel to balance its internal budget, and Russia needs the highest possible oil price to support its ongoing war against Ukraine. Moreover, Iran is a cartel member. Israel’s war against Hamas has caused significant criticism from OPEC members and Russia. The cartel will likely attempt to use petroleum to tighten the economic noose against countries supporting Israel, including the United States. During the 1973 war, the oil-producing state’s embargo caused oil prices to move significantly higher.
While another embargo is not likely on the horizon, production cuts are almost inevitable. Crude oil has become an economic weapon over the past years. The cartel will cite economic weakness in China as a reason for lower production. Still, higher prices, revenue flows, and consumer punishment will be the reasons for tightening the fundamental supply picture at the November 26 meeting.
The wars continue to support oil prices- Russia uses the energy commodity as a weapon, and the Middle East is a smoldering inferno
The war between Russia and Ukraine will turn two years old in February 2022. Russia has used oil, gas, and other commodity production as weapons against “ unfriendly ” countries supporting Ukraine.
Saudi Arabian and other OPEC member support for a cease-fire in Israel’s war against Hamas, an Iranian proxy, is another factor that will lead to punitive production policy designed to inflict economic pain on the U.S. and its allies. Moreover, domestic protests in the U.S. and Europe are putting pressure on the leadership’s support for Israel. Rising oil prices going into the U.S. 2024 election is another factor that could influence the election and support for the war.
Meanwhile, attacks on the U.S. military from Iranian-backed militias, only complicate issues and threaten an expanding Middle East conflict. Since October 7, the Middle East has become a global tinder box, and crude oil is at the center of the stage. Some analysts, including Bank of America , believe petroleum prices could spike to $150 and even $250 per barrel if the Israel-Hamas war escalates.
UCO turbocharges USO and oil on the upside- Leverage requires a plan and discipline
The most recent selloff in the NYMEX crude oil futures market that took the price from over $90 to below $75 per barrel could be a significant buying opportunity. Replacing the U.S. SPR, wars in Ukraine and Israel with the growing escalation potential threaten sudden upside price spikes in the crude oil futures arena.
The most direct route for a risk position in the oil market is via the NYMEX WTI or the ICE Brent futures contracts.
The USO and BNO ETFs track WTI and Brent futures prices.
Meanwhile, the ProShares Ultra Bloomberg Crude Oil ETF is a leveraged ETF that turbocharges United States Oil Fund, LP ETF (USO). At $28.02 per share on November 16, UCO had around $637.5 million in assets under management. UCO trades an average of over 2.8 million shares daily and charges a 0.95% management fee. USO’s fund profile states:
The December NYME crude oil futures contract rose 48.6% from the early May low to the late September high.
Over the same period, UCO rose 78.9% from $20.74 to $37.11 per share. The leveraged ETF delivered less than double the return in the ETI crude oil futures arena and the USO ETF rose 41.9% over the period.
UCO may turbocharge crude oil prices on the upside, but the outperformance comes at a steep cost, time decay. If oil prices move lower or remain static, UCO will lose value.
The twenty-year chart shows the significant time decay cost that weighs on UCO over time.
UCO Split History (Splithistory.com)
Source: Splithistory.com .
The chart highlights four significant UCO reverse splits since 2011 and one 4-1 split in May 2022. Reverse splits erode the value of leveraged ETF products. Please fully understand the risks of leveraged products before investing in them.
UCO is appropriate for short-term long NYMEX WTI crude oil market positions. However, any risk position in a leveraged instrument requires time and price stops. Turbocharging results using leverage involves the steep cost of time decay. Therefore, careful attention to risk-reward dynamics is necessary for success.
The crude oil market faces U.S. buying to replace the SPR at the lowest level in four decades. Moreover, with OPEC+ controlling global pricing, the war in the Middle East and Ukraine remains a reason why crude oil prices will likely find a bottom soon, and substantially higher prices could be on the horizon.
For further details see:
UCO: Consider This ETF As Oil Prices Come Under Pressure