The price of West Texas Intermediate crude bounced 6 percent from a recent low. What’s going on?
Note that Investing inverts the month and day vs US standard order. U.S. readers may find this confusing. Might I suggest an order set by location or a switch set by the user?
Fundamental or Technical Bounce?
Yes, and yes are the answers.
A long-term chart shows the technical picture. And the longer-term it is not pretty for crude bulls.
$WTIC Texas Light Crude Weekly Chart
If you are looking for intraday reports on commodities or futures, Investing.Com is a better source than StockCharts. I use both for various reasons.
Technically speaking, oil is on the verge of a breakdown of a low set in April of 2021. WTI has bounced off this area six times.
A descending triangle is a bearish formation. And this many retests of the same area is technical warning that one day this support level will go crashing through.
Next support on a weekly basis is ~57 then ~33.
Yikes! I doubt we get to 33. If we do, the recession will be much stronger than I expect.
What about fundamentals?
Just the Ticket!
Phil Flynn, author of the Pricegroup Energy Report, discusses the fundamentals in today’s report Just the Ticket!
The EIA reported that ‘U.S. commercial crude oil inventories increased by 0.8 million barrels from the previous week. At 419.1 million barrels, U.S. crude oil inventories are about 4% below the five-year average for this time of year. Total motor gasoline inventories increased by 2.3 million barrels from last week and are about 1% below the five-year average for this time of year. Total commercial petroleum inventories increased by 9.0 million barrels last week. The data also showed a weekly plunge in gasoline demand that fell to 8,478 million barrels since last May. At the same time distillate fuel demand dropped, with refinery runs also declining.
The recent crash in oil prices, that is really out of touch with current supply and demand fundamentals, is raising eyebrows as to the influence of the commodity hedge funds and the price of oil. Even as the International Energy Agency warns about slowing global oil demand growth today, they must acknowledge that global observed oil stocks declined by 47.1 mb in July. The drawdown was concentrated in crude oil, NGLs and feedstocks (-75.5 mb), while oil products built to their highest level since January 2021. OECD industry stocks fell counter-seasonally by 12.3 mb in July to stand 78.5 mb below the five-year average. Preliminary data show continued stock declines in August.’
Today, the Energy Information Administration (EIA) reported relatively low inventories for this time of year.
This happened right at technical support. Short covering led to a 6 percent bounce from the recent low.
What About Longer Term?
Is the price of oil totally disconnected with reality or are the hedge funds signaling something more ominous? The bearish case is that we’re going into a recession. And based on the market sentiment coming out of the Labor Day break, it might be the mother of all recessions.
The other bearish case is that even though OPEC is showing great signs of compliance, non-OPEC oil production may rise to offset the discipline by the old cartel. Even though currently the world is in a supply deficit as demand for oil is at a record high and supply supplies are falling, the IEA is calling for that to reverse. The hope is that that the supply deficit will reverse and we will see production exceeds supply. That would create an oil supply deficit and potentially replenishing stocks that are pretty much below average across most of the world.
The IEA is always trying to justify its call to stop investing in today fossil fuels. The IEA reports, “Global oil demand growth continues to decelerate, with reported 1H24 gains of 800 kb/d y-o-y the lowest since 2020. The chief driver of this downturn is a rapidly slowing China, where consumption contracted y-o-y for a fourth straight month in July, by 280 kb/d. Average annual gains of 900 kb/d in 2024, compared to 2.1 mb/d last year, will take demand to almost 103 mb/d. An increase of 950 kb/d in 2025 will be equally subdued.”
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Recession When?
Phil Flynn asks the right question: “Is the price of oil totally disconnected with reality or are the hedge funds signaling something more ominous?”
The Fed’s Beige Book and a recession indicator with no false negatives or positives provide all the clues you need.
Beige Book Conditions
Note that Fed Beige Book Conditions Are Worse Now Than the Start of the Great Recession.
The current economic headline conditions [from 12 Fed districts] are worse than the conditions heading into the 7th month of the Great Recession.
The McKelvey Recession Indicator Triggered in August
What is the McKelvey Recession Indicator?
Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started.
Edward McKelvey, a senior economist at Goldman Sachs, created the indicator. The problem with the indicator is that it has many false positives.
Improvements to the model by Pascal Michaillat and Emmanuel Saez (PMES), economists at the University of California in Santa Cruz, eliminate all false negatives and all false positive dating to 1951.
What Are the Odds of Recession?
I discussed the PMES improvements and suggested a better way of calculating recession odds in The McKelvey Recession Indicator Triggered, But What Are the Odds?
I calculate odds that a recession is currently underway at well over 50 percent.
The long-term oil chart also suggests weakening demand with a recessionary outlook.
https://unherd.com/newsroom/falling-oil-prices-are-a-warning-of-global-recession/
On this topic, posted yesterday evening on imherd. I subscribe. It’s a great venue.
Market analysis won’t give us any answer I just want to know if it’s beginning a lasting rally.
“Technically speaking, oil is on the verge of a breakdown of a low set in April of 2021. WTI has bounced off this area six times.”
The cat is dead, Jim.
From YCharts
World rig count
Feb 2020: 2126
current: 1735
US oil consumption
1977: 18.44 million barrels per day
2005: 20.53 (all time high)
2023: 18.98
US oil production
Dec 2019: 400 million barrels in one month
Feb 2021: 278 (worst over last 5 years)
current: 396
and yes US Oil imports according to YCharts is around 5.8 million barrels per day (or 174 million barrels of oil imported per month)
Hopefully the US oil consumption will only be no more than 10% of imported oil , which is a significant drop from the current level of 30%
Glad to see someone else here who looks at the numbers. There are so many different numbers to look at when trying to decipher the US (or world) oil market. It is incredibly complicated.
Take US production, consumption, import and export numbers.
Do the numbers include just raw oil, or do they also include NGLs, condensates, and other liquid hydrocarbons? Depends on who is measuring.
The US produces, exports, and imports raw oil. We also refine that oil into its constituent products, some of which are consumed, but also exported and imported. There is a lot of gasoline and diesel both imported and exported.
Refineries are designed for the type of oil that they have access to; heavy, light, sweet, sour, etc. It is very expensive for refineries to change the type of oil they are designed to work with; and even more difficult to change the product mix that they output.
I could go on for hours on this topic. But the point I am trying to make is how difficult it is to assess the myriad numbers that appear in this market. And I appreciate seeing someone else who looks at these numbers.
The issue for me is not the long-term prognosis, which is great given my ‘buy low, sell high’ strategy. Instead, it is the impact of the business cycle, magnified by a faux-debt quagmire, which will set the ‘low.’
Highly recommend getting on the auto dial distribution for Gail the Actuary.
” Today’s debt bubble is driving up stock prices as well as commodity prices.
We can see various pressures around the world associated with this debt bubble.”
https://ourfiniteworld.com/2024/09/11/crude-oil-extraction-may-be-well-past-peak/
The problem with Gail is that she has been predicting imminent doom for at least 25 years now. It hasn’t happened.
The difference between theory and practice might explain 25 years of doom. If you lived off printing your own money, without actually producing, eventually it catches up. The world is awash with faux debt, and money.
So why is Sahm, the economist, discounting Sahm, the rule, now?
The unemployment rate, Sahm explained, has an Achilles’ heel: It doesn’t only go up when people lose their jobs, it can also go up when the number of people looking for jobs goes up.
https://www.marketplace.org/2024/09/11/how-reliable-is-the-sahm-rule-as-a-recession-indicator/
Thanks for that link and another chance to blast her.
Mish
What is the real China story? From what I have been able to surmise, China energy usage is up. However, all the “experts” say it is down, but data seems questionable?
A good question. And hard to summarize.
China has many problems; a property bubble burst; declining population; tariff wars; a leader who is overly focused on maintaining control.
But they also have long term plans for energy that they are successfully executing. They already hit their 2030 goal of 1200 GW of renewable energy. (The US has 350 GW)
Their new goal is to target 25% of their total energy consumption using renewables by 2030, which will require adding another 1800 GW of capacity.
They are working hard to reduce their coal consumption and replace it with natural gas where possible. They are going to be the world’s biggest consumer of LNG shortly.
They have increased oil imports recently but it is impossible to know why. It could be increased domestic demand, or for refiners to refine and export, or to add to their SPR.
They have an SPR of similar size to the US. They tap into it when prices are high and refill it when prices are low.
US Energy Information Administration shows that about 21% of US electricity generation is from renewable sources like solar, wind, etc. and 20% from nuclear power.
Looks like US electricity from renewables has increased about 0.75% annually over the last 15 years.
YCharts shows China oil consumption at 16.58 million barrels per day for 2023 (compared to 19 million for the USA)
and it has steadily increased each year for China since first measured in 1974 at 1.22 million barrels per day.
YCharts source: The Energy Institute Statistical Review of World Energy
It’s simple. Every day that passes, we get closer to the Iranian response for Israel taking out two of their bad guys. And this time, it’s going to probably kill a lot of Israelis. Again, my bet is they respond as soon as the US election is rubber stamped, some days or weeks after 11/5. You can imagine what’s going to happen to the price of oil.
My guess is that PapaDave becomes a mult-millionaire overnight.
Go big on oil just before the election!
P.S. PapaDave, forgive me if I’m underestimating your current net worth ; )
That’s okay. I am very comfortable. But I still enjoy improving my situation. All because I live in a great country that has provided me with the opportunity to succeed. Work, save, invest, repeat.
Other countries in the region might have something to say about your ‘Iranian response’ given what assets the US has in the region.
The bigger fear, IMHO, is poking the Bear with arming Ukraine with long-distance capabilities. To date, Russia has shown restraint, fully aware of meddling by NATO majors. This situation could easily go full Defcon.
What assets does US have in the ME, other than aisreal?
I agree $33 is ‘too’ low (without a major shock), but $45? There appears to be a slow downward drift post June 2022 as the global economy begins to slow. The question is how far does global demand have to drop, and how long will it take to get there. Maybe a good time to be patient before stocking up.
It takes a severe recession to see an oil demand drop. Demand continues to grow during mild recessions. In the last 40 years global demand dropped in just 4 years: 1991, 2008-9, and 2020.
Need more mileage efficiency and electric vehicles as I wonder that is why US oil consumption has essentially decreased slightly from peak consumption (in 2005).
My 3 year old Honda CRV gets about 30 miles per gallon in the city.
I wonder if the CRV’s in 2031 will get 45 miles per gallon.
The 1998 Honda CRV gets about 20 miles per gallon in the city.
Agree. We can get lower gasoline prices by improving fuel efficiency, and producing more EVs and PHEVs.
Isn’t this all for not? When, not if DJT gets into office, he will “Drill Baby Drill” so for America we should be all set! We will make money too, but our cost will go down and stay down for a long time imo. GV’s are going nowhere, and Hybrids are, and use Gas too. EV’s not so much, for a decade or more anyway imo…
Nope. See my earlier posts on why “drill baby drill” will not happen if Trump is elected.
Crude oil is the most traded commodity in the world. There are two markets; the physical market for oil, and the paper market.
The physical market is just over 100 million barrels per day. At $70/bbl, that is $7 billion per day.
The paper trading market is roughly 50x the size of the physical market and has a tremendous influence on the price of oil, often causing a lot of volatility in either direction. Volatility that I try to take advantage of.
When the pandemic hit in 2020, the price of oil crashed into the negatives for a couple of days from a big drop in demand.
When Russia invaded Ukraine, the price of oil spiked to around $120/bbl.
In response, Biden released 180 Mb from the SPR and prices retreated back to the $80 range. A surprisingly successful move which I thought would not work at the time. But it did.
The SPR is slowly being refilled at prices in the low $70s. Over 30 Mb replaced in the last 12 months so far.
Currently, the physical market is slightly undersupplied and worldwide inventories are declining. However, traders in the paper market are concerned about the market being oversupplied in 2025 as OPEC+ brings some of their production back online. This is the main reason that prices have dropped from $80 to $66 recently.
As to the recent bump up from $66 to $69, who knows? That’s just normal market volatility.
Worldwide daily demand is roughly 103 Mpd and daily supply is 102 Mbpd.
OPEC+ is withholding 5.86 Mbpd in an attempt to manage the market and keep prices in the $80 range. They are failing at this as traders don’t believe OPEC’s ability to hold their act together.
Currently, there are a few other market supply interruptions. Conflict in Libya has reduced oil production by 0.6 Mbpd (from 1.2 to 0.6) for the last few weeks. Hurricane Francine has caused disruption of up to 1.5 Mbpd of oil in the Gulf of Mexico. Guerilla attacks on pipelines in Columbia have been interrupting oil exports there for a month now. Houthi attacks in the Red Sea on oil tankers is disrupting the normal flow of oil through that area.
In the long run though, demand for oil is expected to continue to keep growing to 110 Mbpd by 2030 and then level off for a few decades as renewables make a bigger impact.
I expect oil prices to range between $70 and $90 over this time frame.
Which is why I prefer Canadian oil sands companies with 30-70 years of reserves and breakeven costs between $28 and $40. (CNQ, Imperial, Cenovus, Suncor, Meg)
On the other hand, demand for natural gas is expected to keep growing through to 2040. Natural gas is cheaper and cleaner than oil (or coal). There are going to be a lot of natural gas plants built to generate electricity as demand increases due to AI, EVs and crypto. There is also a trend to replace large diesel trucks with CNG trucks.
I hear you, and listen as well. You play in this sandbox way more than most, and seem to be successful at it as well. That’s enough for me, and in the small things I have done, thanks to your guidance and understanding, I have done just fine. Not lost 1 cent, but made some for sure…
No losses! Then you are doing better than I am. Well done!
Aggregate
I do not see any new construction of NG plants in the USA in Democrat states, If Harris wins, I do not expect any new NG plants in the USA. I am not sure where the power will come.
Nope. That is a function of geography, not politics.
From oilprice.com
“This year’s new gas-fired power plants are concentrated close to the biggest natural gas-producing basins in Appalachia and near the Gulf Coast, as well as in Florida, per the EIA data.
The administration expects 20 new natural gas-fired power plants to come online in the next two years, 2024 and 2025, with a total capacity of 7.7 GW.”
No administration (Biden, Harris, Trump etc) wants their constituents to have their lights go out. That’s not good politics.
20 new plants this year and next, all approved during the present administration. I expect this number to keep increasing as we need ever increasing amounts of electrical power.
If recession CL [1M] might test $42. If CL is in re-accumulation possibly $60 before $90. CL [1W] is green with a long buying tail > Sept 3 low. CL is waiting for Oct.
Oil volatility = profits! profits! profits! Selling calls on rallies, buying back on corrections then sitting back and collecting dividends. Price action on IWM similar. The money train has left the station boys, hope you were on it.
October, which is the current front month, made 65.27 which is down more than $10 in 8 sessions, so a $4 bounce back to the 69 handle today is not surprising in 2 days.
What I wonder is whether the “CIA” is utilizing resources to crash the price to help Kamala win, as gasoline prices are highly correlated to consumer sentiment, and also to hurt Russia, as they are about to hurt the CIA project in Ukraine and reflect badly on the utter morons running our foreign policy (and now threatening outright war with Russia as we may approve long range missile strikes directly into Russia). It was still falling even as the hurricane was approaching the Louisiana gulf coast and oil platforms were shut in
And to have a falling knife drop in the face of stocks being low indicates outside forces are acting.
$65 was around where prices were prior to the COVID bioweapon release.
It was odd to not hear much prattle about the tropical system moving through the Gulf of Mexico. Maybe it only catches the news cycle when moving from E to W, rather than Francine’s W to E track? 😉
Currently up only a couple percent. Elliott wave and the indicators suggest a bounce coming. Oil lags gold 20 months so looking for a big one.
A “big one” fundamentally and technically is far more likely to be down, excluding disruption in supply somewhere.
Speaking of leads and lags, is the oil-gold ‘lag’ spurious (as in casual), or causal?
https://www.macrotrends.net/1334/gold-prices-vs-oil-prices-historical-correlation
Civilization runs on fuel. However, agree with bearishness
If:
1) Trump wins, drill-baby-drill … oil supply up, price down.
2) Kam wins, EVs, E-stoves, E-school-buses, etc … oil down long-term
(although potentially up near-term as US supply starts dwindling)
China … entering their own recession. Oil down.
Plus, carbon-neutral efforts reduce the need for oil. Gas is more “green” …haha.
If Trump wins, agree with drill-baby-drill, but it will still take some time to increase supply. In the short term, demand will still be more important for oil prices, but Trump business optimism could lead to increased demand, could help avoid or reduce a recession in US (China TBD). The currently discounted fossil energy stocks might do well on better prospects of less regulation, more access to global markets, more onshoring and domestic construction, perhaps more effective sanctions on some foreign oil sources.
Disagree. Companies don’t want to “drill baby drill”. They have made that mistake in the past and it bankrupted many of them. What they want to do is simply maintain production and sell it at a reasonable price.
Trump could also tell Ford to build 10 billion trucks. But they won’t do it if there is no demand.
It is both simplistic and stupid. But is makes for a catchy political slogan to appeal to voters.
I look at it in the sense of catching up to “Domestic Demand” to allow prices at home to drop by an helpful amount. Stop giving it away to other Countries until we do so. We need to take care of America for awhile, and catch back up to where we were heading/going imo.
Disagree. Asking companies to sell at a loss in order to help the US consumer is not a viable strategy. And asking US companies to stop exporting their wares will not strengthen our economy.
In fact, if a domestic natural gas producer can export some of its gas at $10, it makes it easier for them to afford to sell nat gas at lower prices in the US.
– Asking companies to sell at a loss in order to help the US consumer is not a viable strategy. > Didn’t advocate that at all? However, now that you bring it up, what’s the difference for EV’s for one small example? They get Subsidies (Taxpayers $) without US consumer Consent? Many seem to think that’s a viable strategy…
– And asking US companies to stop exporting their wares will not strengthen our economy. > Didn’t advocate that at all? Stop giving/selling it away to adversaries (China for ex. Or Ukraine).
– In fact, if a domestic natural gas producer can export some of its gas at $10, it makes it easier for them to afford to sell nat gas at lower prices in the US. > Sell, sell, sell I say! Sell For Profit, Sell often!!!
Agree with you on EVs.
Don’t understand “ Stop giving/selling it away to adversaries (China for ex. Or Ukraine).”
Oil companies do not give away oil. And they don’t set the price. The market sets the price. They just sell their oil into the market to another company. That other company could be an intermediary, such as a trading firm, who then sells it to someone else. The oil could change hands multiple times before reaching a final destination. Hard to know if the oil is going to end up in China.
Irrational Exuberance and oil go hand in hand.
Yes. As does irrational pessimism.
Only producer with capacity to swing price is the Saudi’s.
Re: the slogan yes, simplistic as slogans are … it means get the govt out of the way. Drill when business case allows so (marginal cost, marginal return, cost of capital, etc).
Current Admin has massive and ever-changing regs; threatens taxes (raising corporate rates); generally slowing down decisions thus probably doubling the hurdle-rate needed to expend capital to “drill”.
Plus, (re)open ANWR (godforsaken frozen yet valuable wasteland).
Agree. And yet we are producing record amounts of oil and gas in spite of it all. We are the number one energy producer and exporter in the world under the current administration. Companies have become much more efficient and are producing more oil and gas with fewer drilling rigs. There are 5 LNG export facilities under construction and over 20 more approved over the next 5 years by the current administration. We will be doubling our LNG capacity.
Natural gas is becoming the fuel of choice around the world, and will eventually pass oil; and the US has far more NG than oil.
Anwr is okay, but its reserves are equal to about one year of US consumption.
The US does not have a lot of oil reserves left compared to Saudi, Venezuela, Iran, Canada. But we have a lot of NG.
Agree too. But, USA could produce even more; lowering prices; hurting Russia/Iran; helping allies, etc.
Yes, Nat Gas is huge ... Daniel Yergin has a few comments on NG … I’ll have to catch up and learn.
Too bad the OWG (one world govt) has such an EV/solar/wind mania … free-market will take charge if it is allowed.
Disagree. The US government does not produce oil. Companies do. There is no reason for companies to overproduce, glut the market, force prices down, and hurt their bottom line in order to help US allies. Makes no sense. Which, ironically is what happened with natural gas in the last two years. The jump in price from $2 to $9 caused a flood of drilling which resulted in the current glut and prices back at $2. Which has hurt the bottom lines of US nat gas producers.
“ Too bad the OWG (one world govt) has such an EV/solar/wind mania … free-market will take charge if it is allowed.”
Disagree. There is no OWG. There are 195 governments and they are all different in their approach to energy.
Right now, the country that is doing the most in the area of EV/solar/wind is China. And they are doing more than the other 194 countries combined.
If you want lower prices for oil and gas, you should be applauding every solar panel, windmill and EV that is built. Because those will help reduce the demand for oil and gas slightly and help lower prices.
And eventually, we will run out of cheap oil and gas. We will need something to replace it in the future. Better to start building it now.
How do charts account for inflation? $33 from 2021 bought what costs $40 now.
They don’t. Why should they?
But if we cherrypick the $130 top, the price is down 50 percent or so and 30 percent or so inflation-adjusted if that makes any sense.
If we take an extreme case where a currency is hyperinflating, it would never be practical to visit nominal support levels that were established years ago when the currency may have been worth a 10th of the present value.
Here’s a fun chart of oil over 70 years.
https://www.macrotrends.net/1369/crude-oil-price-history-chart
The long term trend (avg) price currently looks to be about $75, with a long term low range, at $45-50
My ‘averaging’ doesn’t account for real or inflated prices–just patterns and relationships with the business cycle. The big issue for me is the debt-driven global economy, keeping in mind that much of that debt was created by adding zeroes to balance sheets, not by savings from income. The world has never been in this position before. When things break, no one knows what will happen.