What on Earth is Happening with Oil Prices?

Crude Oil is down roughly 9% month-to-date

• Crude oil prices (/CL) have cratered at the start of October, losing over 9%.
• The 3-2-1 crack spread has fallen apart, undercutting refiners.
• XLE, XOP and CRAK have sustained significant technical damage.

The calendar turned to October and so did fortunes of the energy market. This week is on course to produce the year's worst weekly performance for crude oil prices (/CL). The conversation has quickly shifted from “when will oil hit $100?” to “how far can oil fall?” It’s been a dramatic shift in sentiment in a short period of time.

There may be a few catalysts to this abrupt turnaround:

— Increased supply: Russia reduced its self-imposed diesel ban to Europe stemming from the Ukraine war sanctions;

— Decreased demand: net crude imports to the U.S. fell by 1.96 million barrels per day, or bpd, according to the U.S. Energy Information Administration;

— The 3-2-1 crack spread (gasoline, heating oil and crude oil) fell to $19.34/brl, the lowest level since January 2022;

— As discussed on Monday's episode of Futures Power Hour, net-long speculative positioning in oil futures reached its highest level since March 2022, suggesting the move may have been driven by profit taking. By Tuesday, it was no longer time to be "an oil man."

These might be the reasons, and they might be completely unrelated. Regardless, meaningful technical damage has been levied against /CLZ3, XLE, XOP and CRAK.

/CL Price Technical Analysis: Daily Chart (April 2023 to October 2023)

When we last wrote about /CLZ3, it was noted that “while /CLX3 has reached the 100% Fibonacci extension of the June 28 swing low/Aug. 10 swing high/Aug. 28 swing low range at 93.03, /CLZ3 has not yet: 92.40 is still in reach. The technical measurement higher may be complete, which turns the technical outlook into a pure momentum play at this point in time.” Momentum broke earlier this week, with /CLZ3 trading at its lowest level since Aug. 31.

Momentum is now bearish, with /CLZ3 below its daily 5-, 13- and 21-EMA envelope, which is in bearish sequential order. The moving average convergence/divergence indiacor, or MACD, has issued a bearish crossover and has started to move below its signal line, and Slow Stochastics are buried in oversold territory. A further drop to the late-August swing low as well as the uptrend from the May and June swing lows closer to 77 may be in the cards before bulls feel emboldened to step in.

XLE Price Technical Analysis: Daily Chart (August 2022 to October 2023)

A rule of thumb is “when prices break out then return to a consolidation, the other side of the consolidation is likely to be test.” XLE broke out of a multi-year triangle in August, only to fall back into it this week. This puts triangle support in focus closer to 82. Momentum is deteriorating rapidly, with XLE below its daily EMA envelope (which is in bearish sequential order, MACD has issued a sell signal while moving below its signal line, and Slow Stochastics are in oversold territory.

XOP Price Technical Analysis: Daily Chart (September 2022 to October 2023)

XOP is taking it on the chin like XLE, except that the former appears to have formed a head and shoulders pattern. The measured move calls for a drop to 131.68; this pattern would be invalidated if XOP were to return above the neckline at 143.17.

CRAK Price Technical Analysis: Weekly Chart (May 2019 to October 2023)

The collapse of the 3-2-1 crack spread (((2*42*(/RB)+42*(/HO))-3*(/CL))/3) to its lowest level since January 2022 has been a gut punch for CRAK, the refiners ETF. The failed triangle breakout to all-time highs has dramatically changed the technical outlook: The weekly timeframe above shows support comes into play at 31. While the big picture bullish outlook remains valid, the short-term shift suggests that bulls will need to remain patient.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

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