A fun thing about energy markets is that after going through periods of boring sideways trading, they tend to celebrate their eventual break-out with huge price swings.  For the past 3 months WTI had been stuck in a $4 range between $51 and $55, then in the past 3 days it dropped by more than $5/barrel.

Of course that’s probably not so much fun for the folks holding a record amount of speculative funds betting on higher prices who watched WTI go from $53.80 Tuesday to a low of $48.79 overnight.  The combined net long position held by money managers as of last Tuesday was over 855,000 so, this week’s collapse has cost them somewhere north of $4 Billion, and is likely a contributing factor in the snowball effect of selling we saw yesterday once support finally broke down.

The past few months of trading have been notable for the numerous head fakes we saw on nearly a daily basis as the market tried to decide where it was going. Perhaps the most notable head fake came yesterday after the DOE report when prices actually rallied for 10 minutes or so before a slow but steady bout of selling began that picked up pace throughout the rest of the session.  The irony is that the DOE report actually had some of the most bullish numbers of the year, and yet it precluded the biggest daily sell-off we’ve seen in more than a year.

So, where do we go from here?  Based on the overnight reaction (an early bounce followed by heavy selling around 4am) it seems like there may be some forced liquidation to get through as those long positions need to meet margin calls.  The charts suggest there’s a case to be made for WTI to make a push towards $45 if it can settle below $50 today, which would mean roughly 15 cents of further downside for refined products.  If the trading patterns this year have taught anything however, it’s that we should wait for confirmation before declaring a new trend… and right on cue those overnight losses have been chopped by 2/3s in the past 30 minutes.

From the DOE Report:

US crude oil inventories hit a record high at 528 million barrels, some 16 million barrels more than the record high reached last spring, and 150 million barrels more than the previous 5 year average for this time of year.  Crude oil production increased another 50mb/day, and surpassed year-ago levels for the first time in more than a year.

Gasoline demand estimates reached their highest level of the year, and for 1 week actually surpassed year-ago levels.  One data point does not make a trend, but it is certainly a good sign for refiners that perhaps the brutal winter in terms of gasoline consumption may be behind us.

CLICK HERE for a PDF of today’s charts

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