Oil Prices Pulling Back From 3-Year Highs

Oil prices are pulling back from the 3-year highs set last week and stock markets are rallying after the Friday night missile strikes in Syria did not escalate further.

It seems like when the market is focused on a trade war, equity and energy prices are moving in tandem, while when they’re focused on a real shooting war, the asset classes will move in opposite directions.  There are legitimate fundamental argument for both reactions – a trade war may be bad for demand while a real war could be bad for supply – so it’s likely we could stay in this pattern until both stories move off the front page.

7 more oil rigs were put to work last week according to Baker Hughes’ weekly report.  That brings the total number of active oil rigs in the US to their highest level in 3 years, just in time to capitalize on prices that are at their highest level in that same span.

Money managers still like betting on higher Brent crude oil prices, with the net long position held by the speculative category of trader reaching a new record high last week.  They are less enthused about the US contracts, making small reductions in ULSD, WTI and RBOB for a 2nd week, although those net positions remain well above their previous 5 year range.

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Trade War & Real War Dilemmas Dominate Action In Energy Prices

The trade war & real war dilemmas continue to dominate the action in energy prices, with WTI and Brent holding near 3-year highs even while refined products seem to have lost their upward momentum.

When you have the US, Russia, Saudi Arabia & Iran (4 of the 5 largest oil producing countries in the world) dangerously close to armed conflict, it’s not hard to understand why oil prices have hit their highest levels in 3 years this week.  One key difference today from the past 3 years is that the excess inventory of oil around the world is no longer there to act as a buffer when these flare-ups in the Middle East happen.

The IEA confirmed that reality in its monthly oil market report, saying it looks like OPEC has accomplished its mission as global oil supplies have pulled back near their 5 year average.  The report holds the global demand outlook steady, while noting the uncertainty surrounding the potential trade wars and real wars that are influencing energy prices.

While the war stories continue to take the headlines, the relative cat fight over the RFS has been put on hold for 3 months following Monday’s meeting at the White House.   RIN Values have stabilized in the high 30s for ethanol and low 60s for biodiesel as we await the next round of big oil vs big ag.

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Charts from the IEA’s monthly report.

Rally In Energy Prices Continued Yesterday

The rally in energy prices continued yesterday with prompt month gasoline and diesel futures tacking on 2.5+ cent gains on the day.

It seems that international tensions are overwriting fundamental measures this week as a bearish confirmation of Tuesday’s API report by the Department of Energy’s weekly inventory update seemed ineffective in stalling this week’s rally. Crude oil and gasoline stocks both built by 3.3 and .5 million barrels, respectively, while diesel offered the only bullish number, drawing down by 1 million barrels. Refinery runs continued their streak in setting seasonal highs and showed a .5% increase in rated last week, topping 17 million barrels per day in throughput.

Self-fulfilling theory or not, Reversal Thursday is gripping energy futures this morning; all contracts concerned are off 0.5%-1% so far today. Barring more news from the White House on how “smart” our anti-Syrian missiles are, today should be mostly quiet regarding price action. RBOB, HO, and WTI contracts all hit a temporary technical indicator that serves as a sort of sanity check on large market moves both yesterday and this morning. The top Bollinger Band seems to be keeping the rally at bay for now, allowing other chart elements to catch up to this week’s market move.

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Easing Trade War Tensions Pave Way For Higher Prices

Energy prices had a strong day yesterday, topping last week’s highs among all three main products and sending Brent crude to a fresh high for the year. Calm words out of China soothing suspense and fear of a looming trade war took the majority of the credit for the large upward move. The uptick in uncertainty surrounding the Middle East, specifically Syria, seems to have contributed to yesterday’s run-up as well. The drop in tension with a demand center and a bump in tension with a supply center seemed to be a perfect combination to rouse some of the bulls that dozed off waiting on a spring rally.

Prices seem cautiously positive this morning after yesterday’s rally. Among an API report with mostly bearish figures, those that would see prices continue their climb are clinging to the ~4 million barrel draw in diesel inventories for upward momentum. Crude inventories built 1.8 million barrels and gasoline added just over 2 million barrels last week. NYMEX HO leads the complex with a gain of $.0170 so far this morning, dragging RBOB and WTI with it at gains just over flat.

Crude oil and its refined product counter parts’ prompt month futures charts showed some pretty interesting action yesterday. All three contracts started the day below their respective 10-day moving averages and blew past them through the day. Setting new highs for 2018 seems to be the only technical resistance keeping the complex from adding another 5-10 cents in the near term. As for the rest of this week, direction from the DOE report (due out at 9:30 central) will likely set the tone, with global news providing secondary cues.

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