Part II: Evaluating the state of crude prices

Our last Trader’s Corner (TC) was a look at the state of crude markets. We decided to expand on that topic for this TC since it is so important to retailers considering hedges for the upcoming winter. We stated in the last TC, which we wrote on July 7, that we thought there was more upside risk than downside risk for crude prices. Crude was amid a good rally that had begun on June 28. That rally continued through July 13. West Texas Intermediate (WTI) closed at $67.70 on the day before the current rally started, and it closed at $76.89 on July 13. That is a gain of $9.19 per barrel, a 14 percent rally.

 

But our article wasn’t really about a short-term rally. It was more about laying the framework for the possibility of crude prices being higher through the end of the year and into 2024.
Chart 1 – WTI Crude
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Chart 1 plots WTI closing prices against the 200-day moving price average. The 200-day moving price average is considered the demarcation line between a bull and bear market. After a long bull market run, WTI fell below its 200-day average in August 2022 and has been in a bear market trend since. The benchmark U.S. crude took a strong run at its 200-day average in April after more OPEC+ production cuts were announced. When it failed to break out of the bear trend, a strong sell-off occurred.

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WTI is now testing its 200-day moving average as a resistance point again. Many technical traders will sell positions to take profits, which will take a lot of the fuel out of the crude rally and possibly leave this rally to the same fate as the April rally. But in our view, there are reasons to believe that WTI will break through the resistance this time around.
Chart 2 – Dollar Index
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First is the simple fact that the 200-day average has been falling, so it is a lower hurdle to clear. In April, it was at $83.73, and now, it’s at $77.32. And of course, being a long-term average, it is going to continue to fall for a while even if closing prices do go higher.

 

Second is that OPEC+ has done more to limit supply. Saudi Arabia voluntarily cut a million barrels per day (bpd) from its exports in July and announced it will do the same in August. Russia announced it is cutting 500,000 bpd from its exports in August. U.S. production remains very consistent around 12.2 million bpd to 12.4 million bpd. The U.S. Energy Information Administration (EIA) just lowered its average forecasted production rate for this year from 12.61 million bpd to 12.57 million bpd. The EIA may lower it again if producers continue to hold the line on drilling. U.S. producers are employing about 50 fewer rigs drilling for crude than at this time last year.
Chart 3 – Mont Belvieu - ETR
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But our key reason to believe crude could move into bull market territory are the changes in the economic situation. There were good reports on inflation at both the consumer and producer levels this week. Consumer prices were up 0.2 percent in June, the lowest monthly gain in two years. Inflation was 3 percent on an annualized basis, down from 4 percent in May. Core inflation that excludes energy and food didn’t fare as well but was still lower. The core annualized rate was 5 percent, down from 5.3 percent. The Bureau of Labor Statistics released the Producer Price Index on July 13. Keep reading...
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Cost Management Solutions LLC (CMS) is a firm dedicated to the unbiased analysis of the energy markets for the propane industry.

Mark Rachal, Director of Research and Publications at CMS, regularly provides insightful looks into various facets of the marketplace.