Crude Oil Under Pressure, but the Trend Remains Bullish

Crude oil corrects

The continuous NYMEX crude oil futures contract reached $130.50 in March 2022. Backwardation or lower prices for crude oil for deferred August delivery made the March high $112.43. On June 14, the August contract peaked at of $120.88, where it turned lower. 

The chart highlights nearby futures were around the $112 level on June 28 and have made lower highs and lower lows since mid-June. 

Energy supply concerns persist- A data problem

Geopolitical tensions and the dramatic shift in US energy policy create supply issues for the world, which continues to rely on fossil fuels for power. Oil, natural gas, and coal prices have retreated but remain at multi-year highs. 

The US is now in the peak driving season with sky-high gasoline prices. Gasoline and distillate refining margins reached record highs in June. The demand for oil products remains robust while Russia’s invasion of Ukraine, sanctions, and retaliation weighs on supplies. 

US energy producers have little or no incentive to increase output given the governments’ vilification of the industry and the greener policy path. Meanwhile, alternative and renewable energy is a multi-decade process while traditional energy continues to be the primary power source. 

The US Energy Department is having issues reporting weekly crude oil and product inventories. In a June 27, 2022, press release, the EIA said it “discovered a voltage irregularity, which caused hardware failures on two of our main processing servers. This issue prevented us from processing and releasing several reports last week, and unfortunately, it continues to affect our ability to release data this week.” The lack of inventory data is unprecedented. One must wonder if the failures could be the result of Russian or other hacking activities, which would be an attack or warning to the US. The timing of the hardware issues is a bit serendipitous, given the US and European support for Ukraine in the war against Russia.   

The trend since April 2020 remains very bullish

While the crude oil price at around the $112 level is in a short-term bearish trend, the longer-term bullish landscape remains intact. 

The chart shows the bullish price path since the April 2020 low, when crude oil’s price fell below zero to under negative $40 per barrel as holders of expiring contracts had nowhere to store the energy commodity. 

Stagflation makes forecasts challenging

Consumer and producer prices have risen to the highest levels in over four decades, causing the US central bank to hike interest rates and reduce its balance sheet. Higher rates choke off economic growth, and the US stock market has been making lower highs and lower lows in 2022. The US 30-Year Treasury bond futures fell to 132-04 in June, the lowest level since April 2014. 

The central bank has made it clear it intends to use all the tools at its disposal to fight inflation, even if it triggers a recession. US GDP contracted in Q1 and is likely to contract in Q2 2022. Two consecutive quarters of contraction is the requirement for a recession. Meanwhile, the US stock market action already screams that a recession is underway. High inflation and recession are the ingredients for stagflation, a challenging economic beast. The central bank has few tools to deal with a stagflationary environment. 

The supply-side issues will remain should lead to higher lows

Central bank tools can impact the demand-side of economies. However, dealing with supply-side issues often requires a different approach. The war in Ukraine and US energy policy continue to wreak havoc with supplies, filtering through to the rest of the economy. Energy is a critical input in all goods and services. Crude oil, natural gas, and coal have become effective tools in Russia’s aggression against NATO and the West. 

Crude oil is a critical weapon for the Russians as they retaliate and seek to destabilize the US and European economies. Releases from the US SPR have not sent the oil price below the $100 per barrel level. We will likely see supply shortages during the 2022/2023 winter season in Europe as Russia tightens the chokehold on European supplies. 

The energy debacle will continue to fuel worldwide inflationary pressures. The Fed’s hawkish approach to monetary policy will do little to address high traditional energy prices. Expect a continuation of higher lows and higher highs in the crude oil market over the coming months. Corrections and downdrafts caused by recessionary pressures could be a golden buying opportunity. Crude oil continues to power the world, and that will not change in 2022 or over the coming years. While alternative and renewable energy sources are the future, petroleum remains the present.

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