Energy Markets Slide as OPEC+ Delays Crucial Meeting

Meanwhile, natural gas inventories are continuing to rise North America and Europe

• Crude oil prices slumped sharply today amid news that OPEC+ would delay a critical meeting to discuss production cuts.

• Rising inventories in North America and Europe continue to weigh on natural gas prices.
• Gasoline prices suggest the U.S. national average could fall to $3 per gallon in the coming weeks.

Market update: crude oil down 7.94% month-to-date

Energy markets were posting a solid rebound over the past few days, but a series of unfortunate events have stacked up to change the course in short order. Inventories continue to build on both sides of the Atlantic, suggesting demand is in a rut. Europe’s natural gas storage is at capacity ahead of the winter months, and U.S. crude oil inventories have jumped meaningfully. The recent American Petroleum Institute (API) report showed a buildup of 9.05 million barrels vs. the expected 100,000.

Supply is problematic as well. An OPEC+ meeting scheduled for today was cancelled because members disagree about how much production would be cut heading into 2024. Apparently, smaller members are reticent to cut production—which is a precondition for Saudi Arabia to turn off its pumps. Even though OPEC+ projected production would be reduced by around 3 million barrels per day (bpd) through 4Q ’23, data suggests that some smaller members are producing beyond their stated quotas, which has translated to a more meager 2 million bpd production cut.

Finally, the ongoing, the ongoing reduction in geopolitical risk premium may also be a factor. News of a truce between Israel and Hamas emerged over the past 24-hours, allowing humanitarian aid to flow into Gaza in exchange for hostages kidnapped from Israel on Oct. 7.

/CL Crude Oil Price Technical Analysis: Daily Chart (April 2023 to November 2023)

The sharp recovery experienced between last Friday and yesterday has been nearly eliminated after the sudden plunge in crude oil prices (/CLF4) today. Down over 4%, /CLF4 is less than $2 off last week’s lows and barely $2.50 away from the uptrend off of the May and June lows. 

Momentum is weak and increasingly bearish, with /CLF4 below its daily 5-, 13- and 21-EMA (one-moving average) envelope, which is in bearish sequential order; /CLF4 hasn’t closed above its daily 21-EMA since Oct. 27. MACD (moving average convergence/divergence) has issued a bearish crossover while below its signal line, and slow stochastics turning lower after failing to move above their median line. A drop into and through 72 can’t be ruled out in the short-term; a significant OPEC+ production cut will be necessary to stave off a bigger decline.

/NG Natural Gas Price Technical Analysis: Daily Chart (April 2023 to November2023)

Natural gas prices (/NGF4) have been sliding since the start of November, when reports emerged that Europe’s inventories were full, thus curbing fears of a renewed energy crisis thanks to Russia’s invasion of Ukraine. /NGF4 hit its cycle lows today, now back down below 3 MMBtu. Momentum is firmly negative: /NGF4 is firmly below its daily EMA envelope; MACD is trending lower below its signal line; and Slow Stochastics are nestled in oversold territory. Volatility isn’t that high either (IV Rank: 27.8; IV Index: 69.6%), so a tradeable low does not appear in focus yet. 

/RB Gasoline Price Technical Analysis: Daily Chart (April 2023 to November 2023)

Gasoline prices (/RBZ3) have been choppy throughout November, trading between 2.0900 and 2.1745. But this may simply be a bearish flag in context of the decline from the September high, considering that this chop has transpired around the uptrend from the May, June and October swing lows. The continuous contract (/RB) shows that gasoline prices are bouncing around their lowest levels since December 2022. Regardless, the bearish outside engulfing bar today suggests that more weakness is ahead; a return to and through the monthly low of 2.0900 can’t be ruled out. Given the lag and spread to prices at the pump, this means the U.S. national gas average could fall toward $3 per gallon in the coming weeks).

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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