Wild Week Comes To A Close

It’s a mixed bag to start for energy futures as a wild week comes to a close. At this point, it looks like this may be looked back on as a pivotal week of trading as the bulls managed to find a floor and hold onto the longer-term bullish trend lines that looked to be broken just a few days ago. Then again, the day is just starting.

So far there’s no new news of attacks or sabotage in the Middle East today, a welcome reprieve after a flurry of action earlier in the week. Some reports suggest that the potential for a war with Iran (or it’s proxies) is still looming large, while the WSJ is reporting that perhaps the whole thing is just a big misunderstanding.

Unfortunately for stock holders, the calm seems to have ended as futures point to another heavy sell-off at the open, which seems to have sapped some of the upward momentum in energy prices as well. It’s worth noting that the correlation between energy and equity futures has turned negative this week, as oil rallies while stocks are dropping. We saw a similar decline last May, and the correlations stayed weak all summer, before the two linked back up in the fall. With trade-war and demand concerns driving stocks, while Middle East war and supply concerns appear to be driving energy, a similar pattern looks possible this year.

Diesel prices reached a new 6 month high in Thursday’s session, and were moving higher again overnight but have since pulled back and are trading slightly down on the day. From a technical perspective, if ULSD futures can break and hold above $2.13, there’s an argument that they can make a run towards last fall’s highs in the $2.30 range. Fundamentally that type of a move is harder to see near term as lackluster demand and increasing refinery diesel production both appear to be headwinds, but the closer we get to year end, the more likely it seems we’ll see a rally when the IMO 2020 diesel scramble begins.

The forward curve charts below seem to reflect a market that’s nervous short term about supply, and longer term about demand, as the recent price increases are all stacked up in the front month contracts, while further forward values stagnate.

CLICK HERE for a PDF of today's charts