Energy Prices Cool, On Track For Sizeable Weekly Gain

Energy prices are taking a breather after a long stretch of consecutive daily gains. Gasoline and diesel prices have moved higher every day so far this week, but are seeing small losses to start Friday’s session, and still have not yet made back all of the losses we saw last week. 

Yesterday we saw both energy and equity markets move higher, with many giving credit to a drop in inflation driven in large part to falling gasoline and diesel prices. In other words, let’s celebrate cheaper fuel prices lowering inflation by increasing fuel prices. Brilliant. 

The slowdown in inflation has helped push the US dollar to its lowest level in 6 months this week. While the negative correlation between the dollar and energy prices still remains relatively weak compared to what we’ve seen frequently over the years, it has been strengthening over the past two weeks, and may once again exert more influence on daily price moves. 

Volatility is on the decline so far in the new year with the VIX approaching its lowest level in 9 months, and the OVX (WTI volatility) reaching its lowest level since last February. It’s hard to say whether this is a sign that 2023 will be a lot less dramatic than 2022, or if we’re just experiencing the calm before the storm.

Today’s pause in the recovery rally could have a coiling spring effect if prices manage to break through their January highs next week, with room on the charts to see more substantial gains in short order. Then again, if the momentum continues to wane, this will be a failed attempt to break out of the range, and the path of least resistance will be a move lower, with another test of the December lows likely as we slog through the winter demand doldrums.  

Speaking of which, the storms hammering the west coast this week are expected to move East next week and blanket large parts of the country with cold rain and snow. While not terribly unusual for January, it will provide another reason for drivers to stay off the roads after 2 weeks of warm weather and could dampen some of the optimism we’ve seen at work this week.

The EIA offered a more in depth look at its predictions that gasoline and diesel prices will move lower on average over the next two years. Even though miles traveled was higher in 2022 than 2019, fuel economy improvements have kept gasoline consumption below Pre-COVID levels, and that trend is expected to continue through 2024. Diesel demand is also forecast to be flat in the US, but stronger globally and the increase in refining capacity this year should help keep a lid on prices.Today’s interesting read from the WSJ: Why government intervention in energy markets has reached levels not seen in over 40 years, and what the unintended consequences of those actions may be. 

 Click here to download a PDF of today's TACenergy Market Talk.