Crude oil (CL) sets the tone for markets. It even drives the farm sector - grain and meat markets follow it. Analysis should start there.
The bearish news no one reports
Scary, apocalyptic stories get clicks and sell newsletters, so the commodity market, like every other industry, gets the most attention when the news is negative. In the short term, how people see things can matter more than reality in commodity markets. Right now we hear about Houthi attacks on Saudi pipelines and the violence across the Middle East. We do not hear the news that is good for oil supply and bad for its price.
The supply picture is bigger than the headlines:
- The US is producing about 14 million barrels per day. That is a small step down but still a record high for US output.
- The Baker Hughes rig count climbs a little each week. Not a jump, but the numbers keep creeping up.
- Venezuela is pumping about 500,000 to 600,000 barrels per day more than the models expected at the start of the year, after the situation there changed.
- The United Arab Emirates is producing about 500,000 to 700,000 barrels per day more than before it left OPEC, and hopes to add another 500,000 to 700,000 by next year.
So supply is rising. You just have to look harder to find these stories. In time this should press prices down, especially with the biggest drop in demand since COVID.
The Brent-WTI spread
The spread between Brent (BZ) and WTI has widened to about $13. That fits, given where Brent sits versus where WTI production sits. The wide gap surprised many. It could mean the pain hits Europe harder than the US, and that diesel and heavy oil product prices stay high for a while.
Seasonality matters. We are heading into the part of the year when seasonal factors work against oil, not for it. At some point that should push prices down. If one of the two falls, the other falls too - despite the wider spread, the correlation still holds. The one thing that shields the US is that it produces its own oil, so it depends less on OPEC and other producers than before.
Diesel: the third parabolic rally
Diesel powers daily life. Some cars use it, but its main job is moving and hauling the goods people buy. Diesel prices have jumped hard three times in the last 20 years - three parabolic rallies. The first two were 2008 and 2022. This is the third.
In each past case the spike was short, then came a sharp collapse and a long stretch of weak prices:
- 2008: peaked just over $4, then traded around $1 six months later.
- 2022: reached about $6, then traded around $2 a year or so later.
Commodities are things to trade, not things to invest in. What we see today may be painful and confusing, but it is most likely temporary. Diesel and fuel oil have probably peaked. If they have not, and prices push to a new high, the move would likely be dramatic, somewhere in the mid-$6 range, which would be hard to watch.
When energy prices get this far out of control, they usually fix themselves. That return to the average normally crosses back below the line, to the downside.
The economic warning
The part no one wants to hear: in 2008 and 2022, the diesel spikes wrecked the economy. The 2008 spike came with the financial crisis. In 2022, whether it was an official recession depends on who you ask, but the market cooled, the economy cooled, and diesel prices fell with them. That pattern is worth watching now. The prices are scary to look at, but for raw materials they are temporary, not permanent.
