A Trio Of Headlines Are Pushing Energy Prices Sharply Lower

Last week’s supply fears that sparked the strongest rally since April have given way to demand fears following a trio of headlines that are pushing energy prices sharply lower. Another round of lockdowns in China is certain to curb demand for fuel by the world’s largest oil importer, European markets are facing fears of financial market instability after the Bank of England was forced to intervene again to prevent fire selling of government debt, and JP Morgan’s CEO warned that the US is likely about to dip into a recession.

That trio of negativity seems to be the driving force behind the sharp pullback in futures this week, whereas physical markets continue to signal that supplies are tight and options to refill storage tanks are few and far between. See this Bloomberg article for a detail look on the changing flows of Russian oil, and why that means supply options globally may soon go from bad to worse.

ULSD futures are leading the move lower after several 10+ cent swings Monday that eventually led to a weaker finish following several rallies throughout the day. The November contract is currently trading down around 15 cents, after being down as much as 22 cents overnight, marking a 39 cent drop from the high trade set Monday morning. Considering that ULSD prices had risen 98 cents in 2 weeks, this type of pullback shouldn’t be too surprising, and was actually a common occurrence this spring, but is also a good reminder of why open interest has dropped so sharply as many traders simply aren’t allowed to take on this type of risk.

The rally, and pullback, in ULSD is eerily similar to what we saw in August, with a 97 cent run-up over two weeks followed by a big reversal. If that pattern plays out again, we should see prices stabilize for a week or two in the $3.60 range. The big question from there is if prices will give back all of their gains like we saw in September, or if they’ll make another push higher. Longer term charts, and inventory reports, continue to favor another rally towards the $4.50 mark this winter.

A storm system is given 60% odds of developing in the Gulf of Mexico this week, but forecast models suggest it will bring heavy rains to Mexico and not threaten refinery row along the gulf coast.

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