Oil investors are rejoicing following WTI crude’s more than 25% bounce off of its February low of $26.05, its lowest level in 13 years. With U.S. crude stocks falling by around 5 million barrels for the week of February 19, there has been a new round of calls for a fundamental bottom in oil prices.
A few more weeks of stock drawdowns will be needed to confirm a fundamental bottom, but the 25% surge in WTI prices since the dip to $26 certainly has been good news for investors. But has the price spike improved the technical outlook for shareholders of the United States Oil Fund LP (ETF) (NYSE: USO)? Here’s a technical look at the charts.
The first bit of bad news for USO bulls is that the ETF has severely lagged WTI prices since the February bottom. In fact, USO is only up 12.1% since February 11. That means that investors don’t seem to be convinced that the spike in crude prices will last.
Secondly, while WTI’s push took it above its 50-day simple moving average (SMA), USO has yet to come anywhere close to its 50-day SMA, which currently sits at $9.42.
In terms of USO’s long-term trend, the ETF is still well within the confines of the bearish channel that has been in place since the downturn started in 2014. The floor of that channel now sits at around $7 and the ceiling is up at $12 or so, which could mean that there’s still some significant short-term up upside remaining for USO. Unfortunately, until USO breaks out of this channel, it is destined to head lower in the long-term.
Oil bulls looking for firm support levels in USO have very little to go by. Since the ETF’s inception, it had never dipped below $22 prior to the current downturn, which means there is no precedent for possible support levels. USO bulls must look to the WTI chart for possible long-term support levels.
From late 1999 to mid-2004, WTI traded mostly between $25 and $40. The recent bounce at $26 suggests that WTI could once again be setting up shop in this approximate range.
Before oil bulls get too excited about a potential $25 bottom, it’s worth noting that WTI did briefly dip as low as $17.12 during the recession in late 2001 before bouncing back into the $25-$40 range within a matter of months.
Although Wells Fargo currently projects only a 23.5% chance of a U.S. recession in the next six months, recession fears are at their highest levels in several years. If the U.S. does fall into a recession, it’s likely that USO will be back making new lows at some point in the near future.
Disclosure: the author has no position in the stocks mentioned.
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