Energy Prices Were Rallying Overnight After Monday’s Sell-Off Proved Short Lived

Energy prices were rallying overnight after Monday’s sell-off proved short lived. Inflation concerns seem to have snuffed out the early optimism however, as products have turned negative following the latest CPI report.

CPI for January came higher than several published estimates with headline inflation up .3% for the month and 3.1% for the past year. Energy prices continue to be the key factor keeping a lid on inflation, with “core” inflation (excluding food and energy) up 3.9% for the year, with shelter, transportation and food away from home rates all up more than 5%. That stubbornly high inflation is pushing equity and energy prices lower as it appears to give the FED more reason to keep interest rates higher for longer. 

The DJIA, S&P 500 and Nasdaq 100 all reached record intra-day highs Monday, although they ended the session on a weaker note and traded modestly lower overnight before the CPI report sparked another round of selling. The positive correlation between daily price moves in equity and energy markets has increased lately, with both RBOB and ULSD futures above 80% with S&P 500 moves over the past 30 days after having a negative relationship for the prior 3 months.

Volatility for both asset classes remains low, with investors acting optimistic that we’ve avoided the recession everyone was certain was coming last year.

Inflation expectations continue to have the strongest tie to daily moves in oil prices, as shown by the 5-year Treasury/TIPs spread chart below. 

The EIA this morning highlighted how the shutdown of BP’s refinery in the Chicago metro area is impacting product markets, although very high inventories in PADD 2 are helping to cushion the impact. It’s also likely we’ll see a build-up of crude oil stocks in the region when the weekly inventory reports come out given that the largest buyer was suddenly taken out of the game. The official timeline for restart remains in question, but it appears that the facility won’t be fully back online for at least another week or two.

Oman’s new 230mb/day Duqm refinery is reportedly cranking up its finished product output, continuing the trend of rapidly increasing capacity from Middle Eastern nations. This facility is strategically located and according to some will be a key asset for both Iran and China to avoid sanctions. The main question near term is whether or not Oman has any pull with its neighbors in Yemen to allow the facilities exports to transit the Red Sea without getting missiles lobbed at them.

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