A few cracks in the wall of the energy rally are beginning to appear this week as prices pull back from 3 year highs. There are plenty of signs that we may have just set a short term top, but given the numerous head-fakes we’ve seen during this run – the longest oil rally in nearly 7 years – it would certainly seem prudent to wait for further confirmation before declaring the end of the bull market.
Fundamentally it’s getting hard to justify crude in the high $60s as the OPEC cuts are already in place, and most projections show the US will lead a global increase in production this year, while global demand growth stays flat. The EIA is predicting further production gains both on a per-rig and total basis in its latest monthly drilling productivity report released yesterday. The agency’s weekly inventory report will be delayed a day due to the holiday, and we’ll get the API weekly stats tonight. In addition, OPEC will release their monthly oil market report tomorrow and the IEA will release theirs on Friday.
From a technical perspective the stage is certainly set up well for a major pullback. We’ve seen crude stall out right into the range of a 50% retracement of the 2014 price collapse, and are now seeing a shorter term break of the bullish trend lines that have held the rally for the past 5 weeks.
With stochastic and RSI indicators both in overbought territory – and record amounts of speculative money having already placed their bets on higher prices – there are plenty of reasons we could see a decline of at least 5% in the next couple of weeks, and perhaps much more as we enter refinery maintenance season. Looking good on paper and actually happening are two very different things however, and as a coach famously put it, “That’s why we play the game”.
Shorter term the big questions this week will be how the winter storm sweeping across the country will affect both supply and demand. Gulf Coast refineries – which aren’t built for cold weather – are facing an unusually long hard-freeze, but so far no shut downs have been reported. Since temperatures are not expected to approach the lows we saw two weeks ago, it seems less likely that the insulated pipes at Midwest and East Coast plants are facing much of a threat, but we’ll have to see if this storm keeps drivers off the roads, or if it just increases heating demand.