Huge Price Reversal From 6-Year Highs

Volatility is back in energy markets after a huge price reversal from 6 year highs in Tuesday’s session was followed up with more whipsaw trading this morning. After Tuesday’s outside down reversal (which the text book will tell you is a bearish signal) we saw prices rally overnight, wiping out more than half of the previous losses, only to see those gains wiped out in 10 minutes of heavy selling this morning before more modest buying picked up again.  

The reversals are putting energy prices up to their biggest technical test in 2 months, threatening to finally put an end to the rally that’s been keeping prices moving steadily higher for the past 8 months. Volatile action is often seen when a trend comes to an end, so we could be seeing energy prices finding a top, but they haven’t yet dropped below their trend-lines, so it’s too soon to say that the bull market is over.

Tuesday’s big swings were largely blamed on the OPEC drama, but the sell-off was much more widespread than just petroleum, impacting both equities and numerous other commodities, that suggests fear may be creeping back into the market after an extended period of re-opening fueled optimism seems to have run its course.  

While oil prices initially spiked when OPEC failed to come to an agreement, it quickly became clear that a lack of an agreement when the cartel is intentionally withholding production may actually be bearish for prices not bullish. Also, keep in mind that Saudi Arabia made its own production cuts – in excess of what the alliance agreed to – last year, so is free to reverse course and increase output whenever it wants.  In both price crashes of 2014 and 2020, we’ve seen the Saudis allow prices to drop to teach the Russians and Iranians (among others) a lesson, and it wouldn’t be surprising to see them do something similar to the UAE now. 

A stronger US Dollar also got credit for the selling, as it often does any time commodities see a broad selloff. The problem with that theory is that the correlation between the dollar and energy price movements has been strongly positive lately, which is the opposite of what it’s “supposed” to be. That certainly doesn’t help explain why the dollar moving higher Tuesday was suddenly bearish for oil when the two have been moving higher in tandem for much of the past month.

RINs joined in on the reversal action, following grain and refined products by dropping 10 cents from where they were trading in the early going. Grain prices are seeing an early bounce this morning, as refined products were, which should encourage buyers that may have grown weary after multiple big drops in the past month.

Elsa was briefly upgraded back to Hurricane status, but has since weakened again to a tropical storm and is soon to make landfall on Florida’s northern Gulf Coast. So far no major disruptions to terminal operations have been reported, or are expected, although several facilities shut down temporarily while the storm passes.

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