Oil Futures Signal Death Cross

Oil Futures Signal Death Cross
The last time this pattern was recognized was February 25th, 2020, which was followed by a plunge of 77 percent over the ensuing two-month period.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author)

This week, one of Rigzone’s regular market watchers takes a look at the signal of a so called death cross pattern in the oil futures market, what oil traders are focusing on, natural gas market trends and more. Read on for more detail.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Crude oil hit eight-month lows this week on several bearish factors during the U.S. holiday-shortened trading week. And, despite a slight rebound Thursday, prices look to settle lower on the week. WTI fell to as low as $81.20 per barrel while Brent traded down to around $87.25 at one point. Traders focused on poor economic news throughout the globe and an across the board build-up in crude and product inventories. Chinese Covid shutdowns are dampening actual demand while negative economic signals are hurting the perception of future demand. Both the European Central Bank (ECB) and the U.S. Federal Reserve remain concerned about inflation rates and plan to continue tightening monetary supply via interest rate hikes. WTI prices are now down 33.5 percent from the 14-year high of $123.70 on March 8. Technical analysts pointed to the fact that the 50-Moving Average (MA) for October NYMEX oil futures fell below the 200-day MA, signaling a so-called ‘death cross’ pattern, which normally leads to further downside. The last time this pattern was recognized was February 25th, 2020, which was followed by a plunge of 77 percent over the ensuing two-month period. The U.S. Fed’s inflation stance has also strengthened the U.S. Dollar which makes WTI more expensive for foreign investors. The market seemed to ignore Putin’s threat to cut off supplies to countries agreeing to the proposed price cap on Russian oil exports. Additionally, an announcement by the OPEC+ group that they will cut output next month by 100,000 barrels per day was essentially a non-event.

This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude rose a whopping 8.85 million barrels to 427 million and decreased to just three percent below normal for this time of year. The API reported that inventories rose by 3.6 million barrels while the WSJ survey predicted a gain of only 300,000 barrels. Refinery utilization fell by 1.8 percent to 90.9 percent, from 92.7 percent the prior week, accounting for some of the build in crude inventory. Total motor gasoline inventories increased by 333,000 barrels to 215 million barrels, decreasing to six percent below average. Distillates increased 100,000 barrels to 111.6 million barrels, or 23 percent below normal. Crude oil stocks at the key Cushing, OK, hub saw a decrease of 500,000 barrels to 24.8 million barrels, or 32 percent of capacity. Imports of crude were 6.8 million barrels vs 5.9 million barrels the prior week, while exports were 3.4 million barrels per day, down from 3.97 million barrels per day the prior week. Exports of refined products were 6.4 million barrels per day. U.S. oil production held at 12.1 million barrels per day vs 10.0 million barrels per day last year at this time. Volumes withdrawn from the Strategic Petroleum Reserve were 7.5 million barrels, which dropped the total inventory to 442 million barrels, the lowest level since 1984. The U.S. oil and gas rig count fell by one last week to 762, the third-straight weekly decline.

U.S. gasoline demand for the four-week period ending September 2 was down 7.9 percent from a year ago. In a partial effort to help with the UK’s energy crisis, newly elected Prime Minister Truss wants to lift the ban on hydrofracturing as part of her proposed energy plan. On the flip side, she is also calling for a cap on energy costs for the average British citizen, which could be a disincentive for those who produce and supply that energy. In the roller-coaster that is the U.S. equities market these days, all three major U.S. indexes moved higher but still look to settle lower on the week. The U.S. Dollar Index traded at a 20-year high this week but looks to settle only slightly higher week-on-week. A stronger greenback is normally bearish for oil prices.

Natural gas came off of its lofty heights this week as prices in the EU abated and the market eyed lower demand with fall approaching. October Henry Hub futures broke the $8.00/MMBtu level but rebounded slightly on a bullish inventory report. The EIA Weekly Natural Gas Storage Report showed an injection of 54 Bcf last week vs the 65 Bcf average and forecasts calling for 56 Bcf. Total stored gas now stands at 2.7 Tcf, around -7.6 percent vs year-ago levels and -11.5 percent from the five-year average. Construction has begun on three new U.S. LNG export facilities. Golden Pass LNG, Plaquemines LNG, and Corpus Christi Stage III could increase U.S. LNG export capacity by 5.7 Bcfd by 2025. Meanwhile, an estimated 100 new projects will focus on recovering methane from U.S. landfills. Coal-fired generation for the first half of 2022 was down 1.2 percent from a year earlier with natural gas gaining the market share.

Rigzone: What were some market surprises?

Until Thursday’s EIA Weekly Petroleum Status Report, the only quantifiable demand degradation appeared to be in China, yet the market took a precipitous fall Wednesday. We seemed to have changed from a perceived global oil supply shortage to a surplus in a matter of days.

Rigzone: What developments/trends will you be on the lookout for next week?

The summer driving season is over so demand for diesel and heating oil will be the primary drivers of support for oil prices. Distillate inventories are extremely low as we head into winter in less than 60 days.

To contact the author, email andreas.exarheas@rigzone.com

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