Crude oil prices plummeted after Saudi Arabia slashed oil prices by nearly 10% over the weekend in retaliation against Russia for its refusal to join the Organization of the Petroleum Exporting Companies (OPEC) in a large production cut. The move could spark a price war between the two oil producing giants that were previously working together in a three-year alliance to support prices.
Analysts aren't sure if the two parties could still reach a compromise or if the production increases will be long term. If the rout continues, oil prices could reach their lowest levels in five years and affect everyone from Venezuela and Iran to debt-laden U.S. shale producers. The only good news is that consumers could benefit from the lower prices.
Of course, the move comes at the same time that the energy markets have already been struggling with the COVID-19 virus that is expected to significantly reduce energy demand from travel and other areas of the economy. The United States Oil ETF (USO), a common way to trade crude oil movements via an exchange-traded fund (ETF), fell about 20% during Monday's session.
From a technical standpoint, the ETF fell below key support levels to fresh all-time lows (for the ETF). The relative strength index (RSI) moved into oversold territory, but the moving average convergence divergence (MACD) accelerated its downtrend. These indicators suggest that the ETF could see a relief rally, but the intermediate-term trend remains lower.
Traders should watch for support near the 261.8% Fibonacci levels at $6.30 with upper resistance at 223.6% levels of $7.33 and trendline resistance near 161.8% levels of $8.08. If the ETF breaks down loader, traders will see a fresh move into uncharted territory. Of course, price action will depend largely on Russia's response to Saudi Arabia's increases.
The author holds no position in the stock(s) mentioned except through passively managed index funds.