It’s Been A Busy And Choppy Start To Trading In August As The Energy Complex Tests The Lower End Of Its Summer Trading Range

It’s been a busy and choppy start to trading in August as the energy complex tests the lower end of its summer trading range, creating some big swings in the early going. RBOB gasoline was down almost a dime around 7am central, but has cut those gains in half in 30 minutes. ULSD prices were down 8 cents at 7, rallied to down 3 as of 7:30, then were down almost 7 again by 7:45.  

RBOB faces an immediate technical test to start the month, with the contract roll bringing prices from a high of $3.71 on Friday, to a test of $3 today. The $3 range has 3 layers of chart support, marking the July low of $3.02, the psychologically meaningful $3 mark, and the 200 day moving average at $2.99.  IF these layers of support break, it looks like we’ll see another 15 cent drop in short order, with a move into the $2.70s possible. Speaking of which, the September RBOB contract is the last summer-spec contract of the year, and the October contract is already trading in the high $2.70s this morning thanks to the combination of steep backwardation and RVP transition. Cash markets are adding to the bearish feel for gasoline prices, with several regional values already around $2.65 this morning, which will mean retail prices below $3.50 coming soon for many consumers if the trend holds.

WTI is also facing another test at its 200 day moving average, after bouncing off of that level in 6 of the past 8 trading sessions. If US oil prices don’t find a way to rally soon (as in this week) it looks like we’ll be talking about oil in the $80s some-time in August.

While gasoline and oil prices look weak on the charts, ULSD is looking relatively strong, with a more neutral outlook. The roll from the expiring August contract did move prompt prices into the lower half of the summer trading range, but there’s still more than 12 cents to fall before chart support gets tested for diesel.

The CFTC’s commitment of traders report shows that money managers continue to have mixed feelings on energy price bets, with the only consistency seen in recent weeks being a lack of open interest outstanding. The open interest for refined products is holding at its lowest levels since 2015, which was when the US fracking boom helped petroleum prices go bust.  Here too ULSD looks the most bullish with new speculative longs entering the market last week, while other funds covered short positions, leading to large increase in net length held by money managers on the week.

Baker Hughes reported a net increase of 6 oil rigs and 2 natural gas rigs last week, ending a 2 week lull in new drilling activity. Texas led the increase with 6 new rigs added last week, 2 each in the Permian and Eagle Ford plays. The total US oil rig count surpassed 600 for the first time since April of 2020 (you might remember this as the month when WTI traded negative) and leaves the possibility that the rig count could reach pre-pandemic levels by year end.

It’s been almost a month since we saw a named storm in the Atlantic, and the NHC suggests this will be another quiet week. Despite the calm waters, forecasters are still calling for an above average hurricane season, and it’s not just the Gulf Coast refining complex that seems extra vulnerable this year:  A WSJ article highlights how a shortage of transformers could spell trouble for turning the lights back on after a storm hits. 

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