It was a case of taking the stairs up and the elevator down for energy prices yesterday after the slow but steady spring rally over the past few weeks faltered only to wipe out nearly half of the total gains realized in one session.  Yesterday’s sell-off was the largest since March 8th when the complex finally collapsed below the boundaries of the 2017 trading range.  The drop 6 weeks ago seemed to have a clear technical reason, while yesterday’s decline has left many scratching their head.

$50 held support for WTI, which looks like it will be pivotal to end the week in determining if yesterday’s action was an aberration, or the beginning of a new downward trend.  The selloff did rapidly change the short-term technical outlook however, with studies that were just gradually moving from bullish to neutral, now pointing lower after weeks of upward progress were wiped out.

There’s certainly a case to be made that the harsh sell-off was largely technical in nature.  After the bullish channel broke earlier in the week, sellers had a false start on Tuesday, before getting it right Wednesday.

There’s also a case to be made that the macro-economic and political issues that have equity markets on edge may have spread over into the energy arena, although yesterday it was oil that made the declines early, while stocks didn’t sell off so sharply until later in the afternoon.

It certainly did not seem to be the DOE report that caused the selling, as we saw an initial pop in prices after the release then a slow burn lower until the early afternoon when the selling really picked up pace.  The headline values were exactly like the API report on Tuesday, so they shouldn’t have been a surprise, but when looking deeper, there is plenty of reason for the bulls to get nervous over what the report may suggest is on the horizon.

The DOE Debate:

Crude Inventories

Bulls:  Crude drew for a 2nd straight week.  Bears:  We’re still only 3 million barrels from all-time highs, 27 million barrels higher than a year ago, and 128 million barrels above the 5 year average.

Crude Production

Bulls:  The rate of increase for crude output slowed to only 17mb/day last week.  Bears:  We’re 300mb/day above a year ago, and less than 200mb/day below 2015 even though there are 100 fewer rigs drilling today than there were then.  We’re still on pace to surpass 2015 levels by the end of this year.

Diesel Demand:

Bulls:  US Diesel demand remains above the 5 year range for this time of year.  Bears:  Even if demand is above average it’s still 1 million barrels/day less than what we’re producing.  Also, the estimate dropped 10% in 1 week, proving that last week’s record high was another example of how flawed the DOE demand estimates are, more than it was a signal of strength for distillates.

Refinery Throughput:
Bears:  The US is on pace to break all-time records for refinery throughput, exceeding last year’s spring peak by more than ½ million barrels/day.  Bulls:  I got nothing.

CLICK HERE for a PDF of today’s charts

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