Energy Correction
Over the first half of 2022, energy was a bright spot in markets. NYMEX and Brent crude oil futures rose 40.62% and 40.24%, respectively. The oil futures closed well below the March highs on June 30, with prices north of $100 per barrel. NYMEX natural gas futures moved 45.42% higher over the first half of 2022. The price was at the $5.424 per MMBtu level on June 30 and was over $6 in mid-June.
Meanwhile, thermal coal for delivery in Rotterdam, the Netherlands, was at the $370 per ton level on June 30, 215.16% higher over the first six months of 2022. The nearby August contract was higher at $391 per ton at the end of last week.
Fossil fuel continues to power the world, and while oil has corrected, oil, gas, and coal remain at the highest prices in years. The XLE, a highly liquid ETF that holds shares of the leading US energy producers, refiners, and related companies, moved from $55.50 at the end of 2021 to $71.51 on June 30, a 28.8% gain. At $68.59 on July 15, the XLE continues to outperform the rest of the stock market in 2022 despite the 4.08% loss over the first half of July but still over 23.5% higher in 2022. The most diversified stock market index, the S&P 500, fell 20.58% over the first half of 2022, settling at 3,785.38 on June 30. The index was at the 3,863.16 level at the end of last week, significantly below the closing level of 4,766.18 on December 31, 2021.
Crude oil prices corrected over the past weeks, but while the short-term trend has turned bearish, the landscape could support higher prices over the coming weeks and months.
A correction takes crude oil futures below the $100 level
Crude oil futures tend to take the stairs higher during bullish trends and an elevator lower during corrections. The spike to the March fourteen-year high in WTI and Brent futures was an exception to the rule as Russia’s invasion of Ukraine shocked the oil market and the world.
The chart highlights the correction in the NYMEX crude oil futures market that took the price to a low of $90.56 last week, the lowest price since February 2022. NYMEX WTI futures for August delivery were at the $97.59 level on Friday, July 15.
Brent futures have been trading at a premium to the WTI futures because they reflect the price of oil production from Europe, Russia, North Africa, and the Middle East. Brent futures also fell to the lowest price since February 2022 last week when they reached $94.50 per barrel. The nearby September contract settled at the $101.16 level on July 15.
Crude oil takes an elevator lower during corrections- Nothing new
As we learned in early 2020, when the pandemic took NYMEX crude oil futures to a record low below zero and Brent futures to the lowest price of this century at $16 per barrel, declines in crude oil often defy logic, reason, and rational analysis. Over the past decades, there are more than a few examples of drops that take prices far below analysts’ expectations before rebounding.
The latest correction took the continuous NYMEX contract from $130.50 in early March to $90.56 last week, a 30.6% drop. Brent futures fell from $139.13 to $94.50, or over 32% over the same period. WIT and Brent futures have made lower highs and lower lows over the past four months.
The four reasons oil will find a bottom and turn higher
Four factors could cause crude oil prices to eventually find a bottom and return to a bullish trend:
While the oil price is correcting lower, the reasons for a bottom and a return to higher prices remain compelling in mid-July 2022.
Natural gas remains highly volatile as the peak season approaches
In June 2020, US natural gas futures fell to a twenty-five-year low of $1.44 per MMBtu.
The chart shows the rally in the US natural gas futures market that took the price of the continuous contract over 6.7 times higher by June 2022, when it reached the highest price since 2008 at $9.664 per MMBtu. Since then, the price corrected as it was around the $7 level on July 15. The last time natural gas futures were at this price in July was fourteen years ago in 2008.
We are in the heart of the summer, which is the peak cooling season. However, the test for the bullish price action in natural gas will come in October 2022 through February 2023, when the peak heating season arrives.
Meanwhile, US natural gas has become a far more international market over the past years, as US LNG travels the world on ocean vessels to locations where prices are much higher. The war in Russia creates natural gas shortages in Western Europe.
The chart shows that UK natural gas never traded above the 2005 117 high until 2021. At the 200.290 level at the end of last week, the price was nearly double the previous record high after rising to the 800 level in March 2022.
The US will struggle to fill Europe’s natural gas void created by Russian retaliation.
As of the week ending on July 8, US natural gas inventories stood at 9.6% below the previous year’s level and 11.9% under the five-year average. US energy policy has weighed on natural gas output at a time when Europe is looking to the US to fill the gap created by the war in Ukraine. Natural gas shortages are likely in Europe this coming winter season.
Follow those trends until they bend
The short-term trend in crude oil has turned bearish, with the prices on either side of the $100 per barrel level. I expect lots of two-way price action in the oil and gas markets over the coming weeks and months. While natural gas remains a bucking bronco with wide price swings, crude oil is now in a bearish correction.
Follow those trends until they bend as they are the best barometers of the path of least resistance of prices. Trends reflect the market’s sentiment. When sellers are more aggressive than buyers, prices move lower. When buyers dominate sellers, they move to the upside. As of Friday, July 15, the sellers were in the driver’s seat in the oil market. Time will tell how long they remain in control and how low they will push the price of the world’s leading energy commodity.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility , inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
Meanwhile, thermal coal for delivery in Rotterdam, the Netherlands, was at the $370 per ton level on June 30, 215.16% higher over the first six months of 2022. The nearby August contract was higher at $391 per ton at the end of last week.
- A correction takes crude oil futures below the $100 level
- Crude oil takes an elevator lower during corrections- Nothing new
- The four reasons oil will find a bottom and turn higher
- Natural gas remains highly volatile as the peak season approaches
- Follow those trends until they bend
Fossil fuel continues to power the world, and while oil has corrected, oil, gas, and coal remain at the highest prices in years. The XLE, a highly liquid ETF that holds shares of the leading US energy producers, refiners, and related companies, moved from $55.50 at the end of 2021 to $71.51 on June 30, a 28.8% gain. At $68.59 on July 15, the XLE continues to outperform the rest of the stock market in 2022 despite the 4.08% loss over the first half of July but still over 23.5% higher in 2022. The most diversified stock market index, the S&P 500, fell 20.58% over the first half of 2022, settling at 3,785.38 on June 30. The index was at the 3,863.16 level at the end of last week, significantly below the closing level of 4,766.18 on December 31, 2021.
Crude oil prices corrected over the past weeks, but while the short-term trend has turned bearish, the landscape could support higher prices over the coming weeks and months.
A correction takes crude oil futures below the $100 level
Crude oil futures tend to take the stairs higher during bullish trends and an elevator lower during corrections. The spike to the March fourteen-year high in WTI and Brent futures was an exception to the rule as Russia’s invasion of Ukraine shocked the oil market and the world.
The chart highlights the correction in the NYMEX crude oil futures market that took the price to a low of $90.56 last week, the lowest price since February 2022. NYMEX WTI futures for August delivery were at the $97.59 level on Friday, July 15.
Brent futures have been trading at a premium to the WTI futures because they reflect the price of oil production from Europe, Russia, North Africa, and the Middle East. Brent futures also fell to the lowest price since February 2022 last week when they reached $94.50 per barrel. The nearby September contract settled at the $101.16 level on July 15.
Crude oil takes an elevator lower during corrections- Nothing new
As we learned in early 2020, when the pandemic took NYMEX crude oil futures to a record low below zero and Brent futures to the lowest price of this century at $16 per barrel, declines in crude oil often defy logic, reason, and rational analysis. Over the past decades, there are more than a few examples of drops that take prices far below analysts’ expectations before rebounding.
The latest correction took the continuous NYMEX contract from $130.50 in early March to $90.56 last week, a 30.6% drop. Brent futures fell from $139.13 to $94.50, or over 32% over the same period. WIT and Brent futures have made lower highs and lower lows over the past four months.
The four reasons oil will find a bottom and turn higher
Four factors could cause crude oil prices to eventually find a bottom and return to a bullish trend:
- The war in Ukraine continues to rage with Europe and the US tightening the sanctions noose around Russia’s neck. Russian retaliation could cause embargos that create severe crude oil shortages, lifting prices.
- One of the factors weighing on oil prices is the Chinese economic weakness caused by the COVID-19 lockdowns. When they end, the demand from the world’s second-leading economy and the most populous country could soar, running the oil bear into a charging bull.
- The US government continues to look elsewhere for oil production as policies address climate change. According to the US Energy Administration, the US Strategic Petroleum Reserve has declined to the 485.1-million-barrel level as of July 8, the lowest level since 1985. The administration continues to withdraw one million barrels each day from the SPR. Eventually, the US will need to replace its reserves.
- There are few incentives for US and European oil companies to increase production in the current environment. OPEC and Russia have no interest in addressing climate change. The world continues to depend on fossil fuels, and alternative and renewable energy domination are decades away. With oil production and pricing controlled by Riyadh and Moscow, higher prices are likely after the current correction.
While the oil price is correcting lower, the reasons for a bottom and a return to higher prices remain compelling in mid-July 2022.
Natural gas remains highly volatile as the peak season approaches
In June 2020, US natural gas futures fell to a twenty-five-year low of $1.44 per MMBtu.
The chart shows the rally in the US natural gas futures market that took the price of the continuous contract over 6.7 times higher by June 2022, when it reached the highest price since 2008 at $9.664 per MMBtu. Since then, the price corrected as it was around the $7 level on July 15. The last time natural gas futures were at this price in July was fourteen years ago in 2008.
We are in the heart of the summer, which is the peak cooling season. However, the test for the bullish price action in natural gas will come in October 2022 through February 2023, when the peak heating season arrives.
Meanwhile, US natural gas has become a far more international market over the past years, as US LNG travels the world on ocean vessels to locations where prices are much higher. The war in Russia creates natural gas shortages in Western Europe.
The chart shows that UK natural gas never traded above the 2005 117 high until 2021. At the 200.290 level at the end of last week, the price was nearly double the previous record high after rising to the 800 level in March 2022.
The US will struggle to fill Europe’s natural gas void created by Russian retaliation.
As of the week ending on July 8, US natural gas inventories stood at 9.6% below the previous year’s level and 11.9% under the five-year average. US energy policy has weighed on natural gas output at a time when Europe is looking to the US to fill the gap created by the war in Ukraine. Natural gas shortages are likely in Europe this coming winter season.
Follow those trends until they bend
The short-term trend in crude oil has turned bearish, with the prices on either side of the $100 per barrel level. I expect lots of two-way price action in the oil and gas markets over the coming weeks and months. While natural gas remains a bucking bronco with wide price swings, crude oil is now in a bearish correction.
Follow those trends until they bend as they are the best barometers of the path of least resistance of prices. Trends reflect the market’s sentiment. When sellers are more aggressive than buyers, prices move lower. When buyers dominate sellers, they move to the upside. As of Friday, July 15, the sellers were in the driver’s seat in the oil market. Time will tell how long they remain in control and how low they will push the price of the world’s leading energy commodity.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility , inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
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