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Brent Crude Climbs But Stops Short Of The 2020 High Triggering A Correction

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  • NYMEX WTI futures break a technical resistance level and then turns lower
  • Brent stops short of the January 2020 high
  • OPEC has control of the oil market
  • The Middle East is a turbulent region
  • Expect Brent to take out the resistance, eventually

Many different grades and qualities of crude oil come from producers worldwide. However, most use two benchmarks for pricing. Approximately two-thirds of the world’s producers and consumers employ the Brent North Sea crude oil price that trades in the futures market on the Intercontinental Exchange. Brent is a sweet crude oil, meaning it has a low sulfur content. Producers in Europe, Africa, and the Middle East use the Brent price as a mechanism and price their output at discounts or premiums based on their petroleum’s physical composition.

The other benchmark is the West Texas Intermediate crude oil price that trades on the Chicago Mercantile Exchange’s NYMEX division. WTI crude oil is even lighter and sweeter than Brent, with lower sulfur content. WTI is the crude oil of choice for processing into gasoline. Brent is favored for refineries producing distillate products like heating oil, and diesel, and jet fuels. WTI is the benchmark price for around one-third of the world’s production and consumption. WTI comes from North America. 

The United States Crude Oil Fund (USO) tracks the price of a portfolio of NYMEX futures while the United States Brent Oil Fund (BNO) moves higher and lower with ICE Brent crude oil futures. This month, NYMEX WTI futures broke out to the upside above the January 2020 high, but Brent futures did not achieve the same feat. 

NYMEX WTI futures break a technical resistance level and then turns lower

Source: CQG

On March 5, nearby NYMEX crude oil futures broke above the January 2020 $65.65 high. On March 8, the price moved higher than the April 2019 $66.60 peak and reached $67.98 per barrel, the highest level since October 2018. Crude oil broke above two technical resistance levels as it climbed a bullish staircase. Last week, the energy commodity decided to take an elevator down through the $60 level.  

As the daily chart highlights, the May NYMEX crude oil futures contract declined last week, posting five consecutive daily losses that took the energy commodity’s price to a low of $58.28 per barrel on March 18. NYMEX crude oil for May delivery turned lower as it was rolling from the April futures contract last week. The price had not traded below the $60 level since March 3 and has been above $50 since January 6. 

Open interest, the total number of open long and short positions, turned lower with the price as market participants holding long positions headed for an exit. Declining open interest as the price falls is not typically a technical validation of an emerging bearish trend in a futures market. Price momentum and relative strength indicators turned lower and daily historical volatility higher after the substantial decline on Thursday, March 18. Nearby crude oil futures fell by over $4.50 per barrel on Thursday, the most significant move of 2021. 

Brent stops short of the January 2020 high

On March 8, nearby May Brent futures rallied to a peak of $71.36 per barrel, only 63 cents below the critical resistance level at the January 2020 $71.99 high. Since then, the ICE Brent futures price corrected with the NYMEX WTI futures.

Source: Barchart

As the chart illustrates, after reaching $71.36 per barrel on March 8, Brent futures turned lower, with the bulk of the correction coming last Thursday, sending the benchmark price to a low of $61.42 per barrel. 

The new active month, May NYMEX futures, closed at the $61.44 level on Friday, May 19, and May Brent futures settled at $64.53 after recovering from Thursday’s low. While the recent corrective price action knocked the wind out of the bull’s sails, the price dynamics in the oil market suggests that the selling will be temporary. 

OPEC has control of the oil market

US energy policy has changed dramatically in 2021. On his first day in the Oval Office, President Biden canceled the Keystone XL pipeline project that takes crude oil from the oil sands in Alberta, Canada, to Steele City, Nebraska, and beyond to the NYMEX delivery point in Cushing, Oklahoma. Fulfilling his pledge to address climate change, President Biden will move to increase regulations on US fossil fuel production and encourage alternative sources for consumers. With a majority of Democrats in the House of Representatives and Senate, US energy production is likely to continue to fall. According to the latest EIA data, US daily output at 10.9 mbpd was 16.8% below the record level in March 2020 at 13.1 mbpd. The shift in energy policy will prevent output from reaching that level anytime in the foreseeable future. 

OPEC members and Russia have suffered from increase output from US shale producers over the past years. As US production led the world, OPEC’s influence over pricing in the oil market declined. The shift in the US hands the pricing power back to the international oil cartel and Russians. Since OPEC’s mission is to achieve the highest possible oil price for its members, they are likely to maintain a policy that extracts the most from US consumers over the coming months and years. While crude oil declined last week, OPEC+ will adjust output to stabilize the energy commodity’s price with a bias to the upside. Squeezing US consumers with higher energy prices is payback for years of low prices because of US shale production. 

The Middle East is a turbulent region

Meanwhile, over half the world’s crude oil reserves are in the Middle East, a tinderbox of potential hostilities. Brent crude oil futures reached a peak of $71.36 on March 8 after Iranian-backed rebels attacked Saudi oil infrastructure. Iran and Saudi Arabia may be OPEC members, but they are also mortal enemies. The region is a hotbed of political tensions, which can always boil over into hostilities in a blink of an eye. 

As US crude oil production declines, the world becomes more dependent on Middle Eastern petroleum, and the price far more sensitive to events in the region. We should expect oil market price variance to increase over the coming months and years. Since Brent is the Middle Eastern benchmark, the ICE Brent futures should experience the most volatility.

Expect Brent to take out the resistance, eventually

The $71.99 level in Brent continues to stand as the critical technical level on the upside. While the price moved away from the level over the past week, the shift in US energy policy and potential for hostilities in the Middle East is likely to eventually push the price towards or above that level. 

The most direct route for a risk position in the Brent crude oil market is via the futures and futures options that trade on the Intercontinental Exchange. The United States Brent Crude Oil Futures Fund (BNO) seeks to replicate the action in the Brent futures market on a short-term basis. The fund summary for BNO states:

Source: Barchart

BNO has net assets of $324.379million, trades an average of nearly 1.5 million shares each day, and charges a 0.90% management fee. May Brent futures fell from $71.36 on March 8 to a low of $61.42 on March 18, or 13.9%.

Source: Barchart

Over the same period, BNO fell from $17.57 to $15.47 per share or 11.95%. BNO holds a portfolio of Brent futures contracts. Since the nearby contract experiences the most price volatility, BNO tends to outperform the nearby ICE Brent futures contract on the downside and underperform when the price rallies. BNO only trades during hours when the US stock exchange is operating. Brent futures trade around the clock from late Sunday in the US through Friday evening. 

The global dynamics in the oil market have changed, with pricing power moving back into OPEC+’s hands. Crude oil took the stairs higher until last week, when a correction caused the elevator journey lower. Meanwhile, I view the price action as an opportunity as I expect higher oil prices in the coming months. 

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The post Brent Crude Climbs But Stops Short Of The 2020 High Triggering A Correction appeared first on ETF Daily News.


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