- As expected, both crude oil markets rocketed higher at Sunday night's open, only to give away most of the initial gains through Monday morning.
- Funds have been buying WTI crude oil, but not excessively so despite the recent escalation of violence in the Middle East.
- Seasonally, WTI crude oil tends to post its high weekly close this week, setting the stage for a possible contra-seasonal extension of this year's uptrend.
Today’s Commentary is brought to you by some friends of mine. Not that they are sponsoring this segment, but rather their questions and comments set the conversational stage this morning. I’ll begin with my friend in the brokerage business whose take on the Wilhelmi Element (The only price that matters is the close) is “Amateurs open, pros close”. As expected, both crude oil markets (Brent and WTI) as well as distillates rocketed higher at Sunday night’s open, gaining 5% or more in the first few moments. Though it isn’t the close yet, far from it actually, but early Monday morning check of the Energies sector shows spot-month WTI (CLQ25) up $0.60 (0.8%), Brent (QAQ25) up $0.60 (0.8%), and distillates (HON25) up 0.5 cent (0.2%) from last Friday’s settlement. Another friend, this one a farmer from central Nebraska, put the pieces together and asked, “Could this escalation be about the dollar or interest rates? But if it pushes inflation with commodities, wouldn’t it lead to higher interest rates?” Yes. I don’t think the markets are concerned about the US president pretending to be tough, but rather the retaliation that might come from Iran, starting with the possible closing of the Strait of Hormuz. Let’s see how things play out this week.
I’ve also seen talk about the coming surge in crude oil prices. In a Sunday piece for Reuters, market reporter John Kemp wrote, “Investors had started to amass a very[i] bullish long position in crude oil futures and options following Israel’s surprise attack on June 13 – even before the United States bombed the country’s (Iran’s) nuclear installations overnight on June 21/22.” A look at the most recent CFTC Commitments of Traders report (legacy, futures only) for WTI Crude Oil showed noncommercial interest held a net-long futures position of 191,941 contracts as of Tuesday, June 10, an increase of 24,000 contracts from the previous report. This past week saw the spot-month contract close $8.29 higher from Tuesday-to-Tuesday indicating investors were indeed continuing to add long futures positions. Meanwhile, the spot futures spread saw its backwardation (inverse) strengthen last week, closing Friday at $1.83 as compared to the previous Friday’s $1.73. This tells us the commercial side was also protecting itself heading into the weekend.
Another interesting factor to consider this week is WTI’s seasonal pattern. The indexes I’ve built based on weekly closes only show:
- The market tends to post a high weekly close the fourth week of June (this week)
- From there, the spot-month contract tends to fall through the third weekly close of August
- The 5-year index (red line) shows an average loss of 8%
- The 10-year index (blue line) shows an average loss of 6%
- The spot-month WTI contract hit a high of $78.40 Sunday night. For fun, let’s say this Friday sees the contract finish at $79.00. Theoretically the range for a low weekly close later this summer would be:
- 5-year Index approximately $72.68
- 10-year Index roughly $74.26
- However, if WTI is able to post a contra-seasonal extension of its winter/spring uptrend, then it would indicate the real supply and demand situation is different than what we usually see this time of year.
- The forward curve has been inverted as long as I can remember, so that read on supply and demand is the same
- Again putting the spotlight on Iran’s next move (e.g. closing the Strait of Hormuz)
And if crude oil, both WTI and Brent, skyrockets over the coming months and years, then it would almost certainly be reflected in the inflation reads the US Federal Open Market Committee tracks, increasing the likelihood of an interest rate hike rather than additional cuts.
Regardless of how many names the US president calls the Fed Chairman.
[i]Even world-renowned reporters sometimes forget what Mark Twain once said about writing, “Substitute ‘damn’ every time you’re inclined to write ‘very’; your editor will delete it and the writing will be just as it should be.”
