The 200-day Moving Average Is Back In Play This Week With ULSD Breaking Above That Resistance After It Repelled Friday’s Rally

After moving lower through the overnight session, energy futures jumped alongside equities following the October CPI reading that came in below most estimates, adding hope that the FED is done raising rates to combat inflation. The recovery rally of the past 2-days has put charts back in a more neutral footing, easing the oversold condition that had developed during the drop to multi-month lows.  

Of course, that drop in energy prices was a key contributor to the flat CPI reading for the month, with fuel oil prices leading the slide down 21%, while gasoline prices were down 5.3%. Excluding food and energy, the total reading was up .2% on the month and 4% on the year.  

The 200-day moving average is back in play this week with ULSD breaking above that resistance after it repelled Friday’s rally, while WTI is currently stuck right on it. If the contracts can hold above that level there’s a good chance, they could soon break above the bearish trend they’ve been in since Mid-October, while a failure here suggests we’ll see new lows before year-end.

The IEA’s monthly oil market report echoed the bullish demand outlook OPEC reported yesterday, with the agency revising its global consumption estimates higher, primarily due to record oil demand in China. The IEA suggests that China accounts for 75% of the total world demand growth this year, which is estimated at 2.4 million barrels/day, and despite headwinds in developed nations, the agency believes total global oil demand will hit a record in 2024. That increase in demand isn’t great news for everyone however, as the agency notes China’s surge in petrochemical production is putting pressure on other refiners in Europe and Asia.

The good news for consumers is that oil supplies are also poised to hit a record next year, with gains in the US, Brazil and Guyana leading the increases. While Guyana is benefitting from off-shore gushers, its next-door neighbor Venezuela is not expected to see dramatic increases in its output despite the recent easing of sanctions, as it will take years of investment to get that country’s production infrastructure rebuilt. 

While the IEA is bullish on US oil output, the EIA is predicting lower US shale production for a 2nd straight month in its monthly drilling report. The Permian Basin, which accounts for nearly half of all US oil output, continues to see modest gains, while gas-heavy shale basins like the Appalachia and Anadarko are dragging oil output lower according to these estimates. While drilling activity has slowed onshore, US Off-shore production continues to increase this year and is approaching record highs set prior to the pandemic, as the larger-project-producers are acting more confident in the long-term viability of those wells, even as the viability of the Federal lease program is very much in doubt.

Big speculators were adding new bets on lower energy prices last week, once again showing their tendency to jump on the bandwagon a couple of weeks late. WTI, Brent, ULSD and Gasoil all saw a large influx of new short positions, just in time for prices to hit a 3-month low Wednesday and then bounce. RBOB futures were once again moving opposite of the rest of the complex with heavy short covering as the funds (who appear much smarter in retrospect) took profits after prices hit their lows for the year. 

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