Is Traditional Energy a Buy on the Dip?

Crude oil has been in a bullish trend since June 2023, with the most recent significant low in mid-December 2023. While the price action has been bearish since the mid-April $86.97 high on the June NYMEX WTI contract and the price has declined below $80, the bullish trend over the past year remains intact.

Meanwhile, natural gas prices have recovered over $2.70 per MMBtu even though the peak demand season ended. As the oil and gas markets move towards the summer, fundamental and technical factors suggest that the downsides are limited, and prices could increase over the coming weeks and months. The current dip in crude oil could be a compelling buying opportunity.

Crude oil falls but remains in a bullish trend

• June NYMEX crude oil has declined below the $80 level.
• Short-term technical support is at the March 11, 2024, $76.07 low.
• Short-term technical resistance is at the April 26, 2024, $84.46 high.
• The bullish trend since December 13, 2023, remains intact with oil above the mid-March low.

The factors favoring another higher bottom

• Wars in Ukraine and the Middle East support higher crude oil prices.
• A recovery in China’s economy would boost worldwide petroleum demand.
• The U.S. SPR at 367.2 million barrels as of May 10 remains significantly below the end of 2021 high at over 600 million barrels.
• While the world addresses climate change, supporting alternative and renewable fuel production and consumption, crude oil remains the leading energy commodity. Moreover, China and India continue to consume increasing amounts of fossil fuels.
• Gasoline is the leading oil product, and gasoline demand typically moves higher during the driving season during spring and summer.

Natural gas could be a model

• Nearby NYMEX natural gas prices fell to a $1.522 per MMBtu low in February 2024.
• The peak season during the winter ended, but an overabundance of speculative short positions has lifted the natural gas price since the March low.
• The most recent May 20, $2.747 high was over 80% higher than the February low.
• Natural gas and crude oil are volatile commodities. Price extensions on the downside can be compelling buying opportunities.

ETF products that reflect oil prices

• The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) track the prices of the two benchmark futures markets, NYMEX WTI and ICE Brent crude oil.
• The S&P 500 Energy Sector SPDR (XLE) and the Vanguard Energy ETF (VDE) track the prices of shares in the leading U.S. crude oil-related companies.
• The VanEck Oil Services ETF (OIH) tracks the price of shares in the leading oil services companies.

ETF products that track natural gas prices

• The United States Natural Gas Fund ETD (UNG) tracks NYMEX natural gas futures prices.
• The Bloomberg Ultra Natural Gas 2X ETF (BOIL) turbocharges natural gas prices on the upside.
• The Bloomberg Ultrashort Natural Gas -2X ETF (KOLD) turbocharges natural gas prices on the downside.

The recent decline in natural gas prices has presented a lucrative buying opportunity, pushing prices significantly higher. Crude oil, being a volatile energy commodity, offers a similar potential. Seasonality, geopolitical unrest, U.S. energy policy, the U.S. SPR, and the possibility of a rebound in China’s economy all point towards a compelling case for crude oil prices to stabilize sooner rather than later. In the current market environment, the downside risk could be limited, while the potential for price appreciation remains high.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!