Consolidation in the Oil Market- Do Not Get Too Comfortable
In early March, when Russia invaded Ukraine, the oil price soared to the highest levels since 2008. While the energy commodity did not reach a new record high, it came close. Nearby ICE Brent futures reached $139.13 per barrel, only $8.37 below the 2008 record peak. The NYMEX WTI futures moved to $130.50 per barrel, $16.77 below the 2008 high.
Meanwhile, the 2008 peak in the oil market did not contain gasoline and distillate prices, which have soared to new all-time highs in 2022. Crude oil is the primary input in oil products, as refineries tend to process WTI into gasoline and Brent into distillates.
The rise in product prices is a warning sign that crude oil demand remains robust and higher prices are on the horizon. Crude oil has corrected from the March high, but the medium-term trend since the April 2020 low remains higher, and products are screaming that new all-time highs are on the horizon.
Markets reflect the economic and geopolitical landscapes. The highest inflation in over four decades, US energy policy, and the war in Europe are factors that will likely draw new upside chart points for crude oil over the coming months.
$100 has become a pivot point
The $100 per barrel level in NYMEX crude is a critical psychological level that has become a base price or pivot point for the energy commodity since February 2022.
The above chart highlights that after NYMEX crude oil spiked to $130.50 per barrel in early March, the price corrected and settled into a trading range around the $100 per barrel level. The nearby futures contract probed below the pivot point in March, April, and May, but each attempt to correct attracted buying and pushed the price back above the psychological price level. On Friday, May 20, the July futures contract settled at the $110.00 per barrel level, with the trajectory favoring the upside.
Product prices and crack spreads have soared- Consumers require products
Crude oil is the input in oil products. Consumers are either direct or indirect buyers of gasoline and distillate fuels. The price action in the products suggests robust energy demand and supports higher crude oil prices.
Crack spreads reflect the refining margin for processing petroleum into gasoline and distillates.
On a quarterly basis, gasoline crack spreads rose to a new all-time high of $58.67 on May 16 and was above the $47.90 level on May 20.
The heating oil crack spread reached $74.05 per barrel on May 3 and was at the $43.80 per barrel level on May 20, above the 2012 previous all-time high. Heating oil is a proxy for other distillates, including jet and diesel fuels.
The elevated crack spreads tell us that the demand for oil products remains high even with crude oil above $110 per barrel.
Demand supports higher oil prices in late May 2022.
Russia and OPEC have little interest in helping the US and Europe
After years of suffering from US shale production that pushed US output to a record 13.1 million barrels per day in March 2020, US energy policy did an about-face in January 2021. Addressing climate change under the Biden administration handed the petroleum market’s pricing power back to the international oil cartel and Russia.
Since 2016, Russian influence on OPEC policy has dramatically increased. Saudi Arabia and Russia now control the energy commodity as the US has taken a backseat because of stricter regulations, fewer pipelines and leases, and less production incentives. Moreover, encouraging alternative and renewable fuel production and consumption has come at the cost of inhibiting traditional energy output. Meanwhile, oil and oil products continue to power the world, and the US, making the US and European allies more dependent on foreign sources.
Warren Buffett once said that you find out who is swimming naked when the tide goes out. It is low tide in the oil market, as Saudi Aramco replaced Apple (AAPL) as the world’s most valuable company last week. Balancing Saudi Arabia’s budget requires crude oil at the $80 per barrel level. With Brent crude oil north of $110 per barrel, the world’s leading producer is experiencing a profit bonanza.
While the US, Europe, and other allies have slapped Russia with sanctions after it invaded Ukraine, China, and India, the world’s most populous countries continue to purchase oil from Moscow, allowing revenues to flow to the aggressive Putin regime. The bottom line is Russia and Saudi Arabia is not predisposed to do any favors to the US, Europe, and other “unfriendly” countries in the current environment. The Biden administration has asked Saudi Arabia to increase its output, but the pleas have fallen on deaf ears in the Kingdom.
SPR releases are symbolic- The selling will require future replacement
President Biden has authorized crude oil sales from the US strategic stockpile. The latest release is for a record one million barrels per day. The US Strategic Petroleum Reserve is an emergency supply for times when shortages develop and for military purposes. Each barrel sold needs to eventually flow back into the caves that hold the petroleum. The more the US government sells, the more it will have to buy in the future.
Meanwhile, SPR releases have historically done little to push oil prices lower. The oil price remains north of $110 per barrel despite the current sales. SPR shales may have symbolic political appeal, but they have little utility in the current environment.
Selling crude oil from the SPR is not the answer to the current high energy prices; increasing drilling and production is the only effective means of pushing traditional energy prices lower. Meanwhile, there are no plans to ramp up US production to take the leadership baton from Saudi Arabia and Russia. On May 13, the Biden administration canceled an Alaskan oil and gas lease sale.
Aside from ceding control of oil and gas prices to Moscow and Riyadh, the higher prices are potent fuel for US inflationary pressures that continue to rise. While the Us central bank has tools to deal with demand-side macroeconomic problems, the rising oil and gas prices are a supply-side factor that requires a solution, not in the central banker’s toolbox. However, the Washington DC administration has no plans or desire to address energy market dynamics by increasing US production. Inflation and OPEC+’s dominance will continue to rise. Moreover, the high oil prices are funding Russian aggression in Eastern Europe; the rising petroleum revenues support the war effort and the potential for further expansion.
Crude oil is building cause for a move to a new all-time high
The current targets for WTI and Brent futures are the early March $130.50 and $139.13 highs. Above those levels, the all-time 2008 peaks at $147.27, and $147.50 are critical technical resistance levels.
Crude oil is consolidating and digesting the move to the highest prices since 2008. Bull markets rarely move in straight lines, and correction and consolidation periods are constructive and healthy. Crude oil is building cause for another bullish leg that could take prices to the $150 level or higher over the coming months. The Saudis and Russians will sit back and cheer as the price rises, Aramco’s market cap, and profits rise, and Russia fills its coffers with the spoils of its economic war with the US and Europe.
Given the rise in refining margins, consumers are already paying record prices for oil products. We may be looking down at $5+ gasoline over the coming months and years. We remain bullish on crude oil, but the road to higher prices could be very volatile. Buying dips in crude oil and oil-related equities could be the optimal approach to the market for the rest of 2022 and beyond. Don’t get too comfortable with the $100 pivot price for crude oil.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- $100 has become a pivot point
- Product prices and crack spreads have soared- Consumers require products
- Russia and OPEC have little interest in helping the US and Europe
- SPR releases are symbolic- The selling will require future replacement
- Crude oil is building cause for a move to a new all-time high
Meanwhile, the 2008 peak in the oil market did not contain gasoline and distillate prices, which have soared to new all-time highs in 2022. Crude oil is the primary input in oil products, as refineries tend to process WTI into gasoline and Brent into distillates.
The rise in product prices is a warning sign that crude oil demand remains robust and higher prices are on the horizon. Crude oil has corrected from the March high, but the medium-term trend since the April 2020 low remains higher, and products are screaming that new all-time highs are on the horizon.
Markets reflect the economic and geopolitical landscapes. The highest inflation in over four decades, US energy policy, and the war in Europe are factors that will likely draw new upside chart points for crude oil over the coming months.
$100 has become a pivot point
The $100 per barrel level in NYMEX crude is a critical psychological level that has become a base price or pivot point for the energy commodity since February 2022.
The above chart highlights that after NYMEX crude oil spiked to $130.50 per barrel in early March, the price corrected and settled into a trading range around the $100 per barrel level. The nearby futures contract probed below the pivot point in March, April, and May, but each attempt to correct attracted buying and pushed the price back above the psychological price level. On Friday, May 20, the July futures contract settled at the $110.00 per barrel level, with the trajectory favoring the upside.
Product prices and crack spreads have soared- Consumers require products
Crude oil is the input in oil products. Consumers are either direct or indirect buyers of gasoline and distillate fuels. The price action in the products suggests robust energy demand and supports higher crude oil prices.
Crack spreads reflect the refining margin for processing petroleum into gasoline and distillates.
On a quarterly basis, gasoline crack spreads rose to a new all-time high of $58.67 on May 16 and was above the $47.90 level on May 20.
The heating oil crack spread reached $74.05 per barrel on May 3 and was at the $43.80 per barrel level on May 20, above the 2012 previous all-time high. Heating oil is a proxy for other distillates, including jet and diesel fuels.
The elevated crack spreads tell us that the demand for oil products remains high even with crude oil above $110 per barrel.
Demand supports higher oil prices in late May 2022.
Russia and OPEC have little interest in helping the US and Europe
After years of suffering from US shale production that pushed US output to a record 13.1 million barrels per day in March 2020, US energy policy did an about-face in January 2021. Addressing climate change under the Biden administration handed the petroleum market’s pricing power back to the international oil cartel and Russia.
Since 2016, Russian influence on OPEC policy has dramatically increased. Saudi Arabia and Russia now control the energy commodity as the US has taken a backseat because of stricter regulations, fewer pipelines and leases, and less production incentives. Moreover, encouraging alternative and renewable fuel production and consumption has come at the cost of inhibiting traditional energy output. Meanwhile, oil and oil products continue to power the world, and the US, making the US and European allies more dependent on foreign sources.
Warren Buffett once said that you find out who is swimming naked when the tide goes out. It is low tide in the oil market, as Saudi Aramco replaced Apple (AAPL) as the world’s most valuable company last week. Balancing Saudi Arabia’s budget requires crude oil at the $80 per barrel level. With Brent crude oil north of $110 per barrel, the world’s leading producer is experiencing a profit bonanza.
While the US, Europe, and other allies have slapped Russia with sanctions after it invaded Ukraine, China, and India, the world’s most populous countries continue to purchase oil from Moscow, allowing revenues to flow to the aggressive Putin regime. The bottom line is Russia and Saudi Arabia is not predisposed to do any favors to the US, Europe, and other “unfriendly” countries in the current environment. The Biden administration has asked Saudi Arabia to increase its output, but the pleas have fallen on deaf ears in the Kingdom.
SPR releases are symbolic- The selling will require future replacement
President Biden has authorized crude oil sales from the US strategic stockpile. The latest release is for a record one million barrels per day. The US Strategic Petroleum Reserve is an emergency supply for times when shortages develop and for military purposes. Each barrel sold needs to eventually flow back into the caves that hold the petroleum. The more the US government sells, the more it will have to buy in the future.
Meanwhile, SPR releases have historically done little to push oil prices lower. The oil price remains north of $110 per barrel despite the current sales. SPR shales may have symbolic political appeal, but they have little utility in the current environment.
Selling crude oil from the SPR is not the answer to the current high energy prices; increasing drilling and production is the only effective means of pushing traditional energy prices lower. Meanwhile, there are no plans to ramp up US production to take the leadership baton from Saudi Arabia and Russia. On May 13, the Biden administration canceled an Alaskan oil and gas lease sale.
Aside from ceding control of oil and gas prices to Moscow and Riyadh, the higher prices are potent fuel for US inflationary pressures that continue to rise. While the Us central bank has tools to deal with demand-side macroeconomic problems, the rising oil and gas prices are a supply-side factor that requires a solution, not in the central banker’s toolbox. However, the Washington DC administration has no plans or desire to address energy market dynamics by increasing US production. Inflation and OPEC+’s dominance will continue to rise. Moreover, the high oil prices are funding Russian aggression in Eastern Europe; the rising petroleum revenues support the war effort and the potential for further expansion.
Crude oil is building cause for a move to a new all-time high
The current targets for WTI and Brent futures are the early March $130.50 and $139.13 highs. Above those levels, the all-time 2008 peaks at $147.27, and $147.50 are critical technical resistance levels.
Crude oil is consolidating and digesting the move to the highest prices since 2008. Bull markets rarely move in straight lines, and correction and consolidation periods are constructive and healthy. Crude oil is building cause for another bullish leg that could take prices to the $150 level or higher over the coming months. The Saudis and Russians will sit back and cheer as the price rises, Aramco’s market cap, and profits rise, and Russia fills its coffers with the spoils of its economic war with the US and Europe.
Given the rise in refining margins, consumers are already paying record prices for oil products. We may be looking down at $5+ gasoline over the coming months and years. We remain bullish on crude oil, but the road to higher prices could be very volatile. Buying dips in crude oil and oil-related equities could be the optimal approach to the market for the rest of 2022 and beyond. Don’t get too comfortable with the $100 pivot price for crude oil.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.