Opinion: Crude Oil $USO has Bottomed (2021)
Crude oil has fallen nearly 25% from its October highs due to uncertainty surrounding OPEC+’s output policy decision and amid recent growing fears over omicron COVID variant. Prices were also pressured as the Biden administration tightened travel rules to and within the U.S., requiring all in-bound international passengers to test for COVID within 24 hours of departure. It is my opinion that these negative tailwinds are done being priced in by the market. Crude oil has BOTTOMED here for the year in my opinion. Here are my reasons:
The discovery of a new coronavirus variant ‘omicron’ likely will give the OPEC+ countries adequate reason to pause planned production hikes, which already was a distinct possibility in reaction to the release of oil reserves by the U.S. and other energy consumers. As the new Covid-19 variant emerges, it could produce new shutdowns and travel restrictions which is exactly the type of change in market condition that could cause OPEC+ to change course and NOT increase supply.
Seasonality: From a seasonality perspective, data shows that December is a good month for crude oil. Historically, dating back to 20 years, Crude Oil has posted a positive return of 0.8% for the month of December.
Price Analysis: This is in my opinion most important when trying to nail a bottom on an asset. When it comes to calling bottoms on stocks, commodities, and bonds, you are looking to identify when money is trapped. The only way to do this is through price and order flow analysis. The macro side of things will help the trader, but price and sentiment will always be the trigger. I will keep it short and sweet, based on my price analysis, shorts are trapped here, and we saw the first wave of forced-covering today that will continue into next week. Low-volume nodes are present on the tape, which confirms trapped money. I love gaging sentiment, especially through social media platforms like twitter. What I am hearing is, ‘capitulation type’ sentiment. Exactly the type of sentiment you find at bottoms.