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The Rally In Energy Prices Is Facing Its Biggest Test Of The Past 2 Months

Wednesday, Feb 9 2022
Market Talk

The rally in energy prices is facing its biggest test of the past 2 months, with the price action over the next few days looking to be pivotal for the weeks ahead.  NYMEX futures survived their biggest daily selloff since the Black Friday Omicron meltdown Tuesday, and managed to hold above their bullish trend-lines on the weekly charts, which keeps the door open for another rally in the next few weeks if prices can sustain near current levels. Then again, there are still signs that the selling may not be over, as we saw a heavy wave of selling around 7am central that pushed ULSD down 2.5 cents and RBOB more than a penny on the day, but those losses only lasted around 10 minutes before recovering to the overnight range. 

The API reported inventory draws across the board last week in its Tuesday afternoon report, which seemed to temporarily help the market find a bid, but that proved short-lived as the selling picked up again overnight. The EIA’s weekly report is due out at its normal time this morning. We are near the point where gasoline inventories usually peak out before drawing down ahead of the spring RVP transition, and with reports of heavy buying ahead of last week’s winter storm, we could see stocks make the turn this week.

Diesel stocks are also likely to see further declines, even though ULSD calendar spreads continue to pull back, but calendar spreads remain in the steepest  backwardation since 2008, when futures rallied north of $4/gallon in July before crashing to $1/gallon in December. John Kemp of Reuters is arguing this morning that diesel has become a key signal of inflation in the US, and tight supplies could continue to drive prices higher. Meanwhile, a Bloomberg article earlier this week highlighted that several commodities are seeing similar curves as supply chains struggle to match current demand.  

The reports that progress in the Iran nuclear negotiations are driving the pullback in prices this week continue, even as Iran decided now was a good time to publicly display a new long range missile system which all but ensures that any agreement, if any is reached, will not be taken seriously.

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