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June 1, 2020

What the Futures Tell US About Oil

Frank Cabibi

Featured Photo From: https://responsive.fxempire.com/cover/1845x1230/webp-lossy-70.q50/fxempire/2020/05/Crude-Oil-Pump-6.jpg

WTI Crude Oil Futures gained 88% last month, as oil reaches a record gain for the month of May. USOil is essentially flat since open, but looks like it recently converted that resistance into support, and perhaps become a long position for traders. Futures gained during the month of May, but dropped today in light of the tensions between US and China.

What Are Futures?

Traders purchase or sell contracts with a predetermined price at a specific time in the future. In other words, traders enter in a contract now for a future price of that commodity, stock or index. Futures markets are based on this flow of predetermined prices that are expected to come.

Last month, the June and July futures for oil were up substantially, creating a strong sentiment for investors to purchase oil. But futures change; one week, they could be up and the next week down.

What Are July Futures Telling Us?

Source: https://oilprice.com/widgets/oilprice_image/45_5_1591035540

On the chart above, you can see the heavy changes in price for the futures contracts. This chart shows the WTI Crude Oil futures prices in the past one year. Futures hit as high as $63.27 on January 6, 2020. As of now, July futures are down a little over 1% for the day at $35.13. Since late April and into May, prices climbed significantly due to increased demand. Today, we saw a small decline even as OPEC plans on continuing cuts on production to lessen supply and cause prices to rise again. This drop in futures prices has something to do with relations with the US and China.

In more recent news, Russia and OPEC are closer to reaching a decision, but tensions between the US and China not only affect market prices, but commodities like oil too. The report on potential production cuts is expected to be on June 4, which will determine the decisions of traders and investors alike. If we were to see an extended cut for another month, demand in this global commodity will probably rise, as well as the price.

Technicals

The 14 day RSI now reached 63, almost the highest it's ever been since the beginning of this year, showing signs of becoming overbought (overbought is 70). Regardless, the prices will swing depending on news of the US and China talks.

This screenshot I took on TradingView shows the price of oil in relation to the S&P 500. You can tell that they are mostly climbing and descending together. That is why the US and China issue is imperative in oil's price, along with OPEC's decision on cuts. With oil climbing closer to its 200 DMA, we might be able to reach that resistance level if production cuts happen again and tensions between the US and China dwindle.

What Now?

With the Sino-American relationship creating volatile markets back in 2019, this could prove to be the biggest mover for US markets and commodities. Traders are awaiting the news on OPEC as futures fluctuate between small positive and negative gains/losses for the day. Tensions have gotten worse between the two countries based on how the US blames China for mishandling the present pandemic and their national security laws. Traders are concerned that the price will not continue to rise.

Notes

- Watch for OPEC's decision expected to report on June 4
- Stay posted on US-China conflict
- Look out for upcoming resistance on the 200 day moving average
- If oil futures gain, the current price of oil will follow
- US market indices can help gauge the price and momentum of oil
- Keep an eye on USOil futures as well as US market futures

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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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