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Combination Of Bullish Technical And Fundamental Factors To Push Oil And Diesel Prices To 7 Year Highs

Tuesday, Jan 18 2022
Market Talk

The rally continues in energy markets as a combination of bullish technical and fundamental factors combine to push oil and diesel prices to 7 year highs. For ULSD, this would mark a record setting 12th straight trading session with gains, but since yesterday’s holiday means there was no settlement published, it will only count as 11.

“There’s no such thing as a triple top.” In October 2018 Brent crude reached a high of $86.74 before falling to $50 in December. In October of 2021 Brent topped out at $86.70 before dropping to $65 in December, and yesterday Brent topped out at $86.71. The old, and often disputed, trading adage proved true overnight, with Brent rallying north of $88, which now opens the door for another move higher, with a rally to $100 looking certainly possible. ULSD is looking similarly bullish on the charts, with a push towards $2.80 and even $3 looking more likely now that prices have enthusiastically followed through on their breach of technical resistance.

It’s not just the charts that look supportive of a sudden spike either, the escalation of tensions in Ukraine seem to be contributing to some panic buying as the risk of Russia using oil and gas exports as a weapon seems to be growing. In addition to the large amounts of natural gas which can indirectly push up oil and product prices when replacement options are needed, Russia exports roughly 2 million barrels/day of oil to other parts of Europe, that will no doubt be threatened if the conflict continues to escalate. 

Cause or Effect? The combination of bullish factors has drawn large amounts of fund money back into the energy arena in recent weeks, which can create a snowball effect as bandwagon jumping begets more buying. So what might stop the rally? Short term there are plenty of overbought signals on the charts, so trading algorithms might start selling heavily at any sign of a pullback. Longer term, the stock market may be foreshadowing the end of the bull run as it continues to pull back under the weight of higher interest rates, and in some cases, higher fuel prices.  Unfortunately, that sets up a scenario where a supply-fear price spike may lead to a longer term demand collapse and we end up seeing lower fuel prices because the economy starts to shrink.

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