The black cats crossed the path, and someone stepped on the cracks and broke the market’s back. It’s Friday the 13th and what better day for an oil and commodity comeback after a freakish pr and post-Labor Day crash in oil prices?
The oil market closes higher for the week, but it sure doesn’t feel like it because the price for the front month WTI crude contract is still below 70 a barrel. The crack spreads for both gasoline and diesel look pathetic and some of that may be a seasonal weakness for demand.
In fact, the recent sell-off in oil is so out of touch with current market fundamentals and driven by a near-record short position by a hedge fund is like something we really haven’t seen since March of 2013 when we had the Silicon Valley bank crisis and the failure of UBS.
If we follow the same path, the disconnect from market fundamentals should correct soon and we may be making new highs for the contract in short order.
On the other hand, if we start to see signs that the hedge fund market sentiment is right and the economy is headed into the worst demand crash since covid get ready to panic or at least look for a four-leaf clover to put in your pocket.
If, we see signs that that oil demand that is currently near record highs is really collapsing get ready for a deep dark recession….
Some credit the oil price the recovery to Hurricane Francine which according to the latest from The US Bureau of Safety and Environmental Enforcement (BSEE) that reported that approximately 41.74% of the current oil production and 53.32% of the current natural gas production in the Gulf of Mexico has been shut in.
Yet some believe that the crash in oil prices was way out of touch with the fundamental and irrational pessimism that hit the market ahead of a three-day holiday when the market was most vulnerable to weakness.
My take is that we feel the markets are extremely overdone to the downside. Obviously, we’ve done some technical damage. We really do need to get back above $70.00 a barrel.
I think that what we’re seeing here in oil is out of touch with where we are and the economy.
There are some real pessimists out there. We are seeing lower freight rates.
People are concerned that the economy is slowing, and consumers are out of money. The pathetic jobs market is playing into the weak oil demand fears. We also of course have concerns about the US trade deficit that was just astronomical raising fears that the US government is running out of other people’s money. The U.S. budget deficit reached $1.897 trillion for the first 11 months of the 2024 fiscal year, the Treasury Department said on Thursday, as annual interest costs on the public debt topped $1 trillion for the first time.
Also, Chinese economic fears have been the Achilles heel for the oil market sentiment for years. The Wall Street Journal is reporting today that “China Is Risking a Deflationary Spiral/ Pressures are building amid excess capacity and insufficient stimulus from Beijing”
They say that deflationary pressure is building up in the country. China’s consumer prices rose 0.6% from a year earlier in August, but that was largely driven by food prices, which were affected by extreme weather. Stripping out food and energy, China’s core CPI only rose 0.3%. Another way to look at this is the so-called GDP deflator, which is the difference between China’s nominal and real GDP growth, representing broad changes in prices. By that measure, China has already been in deflation for five straight quarters.
The implosion of the housing market has put a drag on the whole economy. Property developers, and related sectors such as materials, have scaled back their investments. Households, for whom property has long been the most important wealth-building asset, have tightened their purse strings. Lower consumer spending has pushed prices down, which puts pressure on corporate profits and in turn wages.
Those risks create a vicious cycle, making deflation more entrenched. In a recent note, Morgan Stanley’s analysts went as far as saying that deflation is now China’s “public enemy #1.” As reported by the Wall Street Journal.
Natural Gas is coming back but has some challenges.
The Wall Street Journal reports that “ A hot summer hasn’t been nearly enough to offset the surplus of natural gas that has accumulated over the past two warm winters in the U.S. Absent a cold winter, signs are pointing to another season of misery for producers. Front-month Henry Hub prices have averaged $2.19 per million British thermal units so far this year, the lowest average through this time of year since the pandemic demand shock seen in 2020. Spot prices for August were the lowest they have been since 1998, according to the Energy Information Administration.
“The market really has been under a deluge of supply for the entirety of 2024,” said Eli Rubin, energy analyst at EBW Analytics. It started last winter when U.S. natural gas production surged to record levels despite already full storage. Unusually warm temperatures led to demand that wasn’t nearly robust enough to work through the excess natural gas.
Natural gas of course is still being impacted by hurricane Francine and the problem is that the Atlantic is far from done even though Francine has hit landfall.