Wednesday, January 13, 2016
While the steep decline in Crude Oil prices is definitely grabbing the attention of the media, another prominent energy source -- Natural Gas -- is also in the midst of a bearish trend. While prices did see a moderate rise the past couple of weeks on the forecast for colder temperatures, it is, after all, the "heart" of winter in the northern hemisphere. It now appears that the latest "cold spell" may not be as severe as originally thought, and some forecasters are calling for above normal temperatures to return as we move the calendar to February. U.S. Gas inventories are already more than 14% above the 5-year average for this time of year, and that is following a greater than expected draw from storage last week. While Natural Gas drilling rigs continue to fall, Gas demand continues to lag supplies, as continued improvements in drilling technology have lowered the costs of production -- particularly in the shale formations that have become a major "market disrupter" in the energy markets.
Today's Xpresso title best explains the current situation in the U.S. energy markets, where an abundance of both Crude Oil and Natural Gas has sent prices to levels that were prevalent back in the 1980's and 1990's. Excluding the Strategic Petroleum Reserve (SPR), U.S. Crude inventories totaled 482.3 million barrels for the week ending January 1. To put this total into perspective, 20 years ago U.S. Crude inventories totaled 302 million barrels and front month Oil futures were trading below $20 per barrel. Going back even further to January 1986, U.S. Crude inventories totaled almost 327 million barrels and prices were near the $25 dollar per barrel level. The Oil market of 1985 and 1986 has some similarities to the current market environment, with prices falling from near historic highs at the time of more than $30 per barrel, to eventually forming what is now an historic low near $10 per barrel in April of 1986. With the exception of a "brief" price spike during the Gulf War, Oil prices remained relatively steady until May 2004, when Crude Oil futures finally surpassed the Gulf War highs and ushered in what could be argued was the start of the historic bull market in not only Crude Oil, but commodity prices in general. What can be gleamed from studying the past performance of commodity markets is that prices really tend to move in waves from bullish to bearish, with generally longer periods of relative price stability. The adage "this time is different" rarely is, as the general function of supply and demand continues unheeded in helping to influence market prices. Finally, it might behoove any serious market participant to enjoy a market trend while it lasts, as trying to pick market tops and bottoms is an extremely difficult proposition, and no one has that magical crystal ball that can predict when prices cannot rise any further or fall any lower with any degree of certainty.
Looking at the monthly continuation chart for WTI Crude Oil futures, we notice prices attempting to test the $30 per barrel price line for the first time since 2003 for the lead month futures. Potentially more interesting is the 14-month RSI, which has fallen into oversold territory with a current reading of 25.20. The last time the monthly RSI was this low was back in 1986, just before the "major" low near $10 was made. While $30 appears to be a "psychological" support level, chartwise we do not see any major support until closer to $25 per barrel, with the next "major " support level seen at the November 2001 low just above $17 per barrel. The next significant chart resistance level is found near the May 2015 high around the 62.50 price level.
Mike Zarembski, Senior Commodity Analyst