Oil Price Action Says Bearish Despite Bullish Headlines
Front-month crude sits just below $85 a barrel. Brent is a little above $92. The market waits on what has been called the toughest ever sanctions push against Iran. The headlines read bullish, but the price action runs bearish. Crude keeps making lower highs. The $88 level in the front-month contract marks the downtrend line drawn from the April highs, so the market holds resistance there. A probe up to $91 is possible if the announcement or other news this week shakes things loose, but the likely path is lower.
Most people watching this have forgotten OPEC. The group has been slowly bleeding supply back into the market with almost no attention paid to it. That quiet added supply is the story being missed.
The Disconnect Between Crude and Refined Products
Gas and diesel have split from crude in a way rarely seen. The AAA national gas average sits close to $4.10. Diesel added about 17 cents in a week, and in Chicago drivers regularly pay more than $5 a gallon. In the last couple of weeks, the gap between oil and the refined products made from it hit record disconnects.
Big cities should get some relief. Seasonality pushes gasoline prices down heading into fall. The Trump administration moved ahead of the normal switch to winter gasoline, allowing that changeover to start earlier, which could bring modest relief since winter blend is cheaper and fall demand drops.
Diesel is the bigger worry. Crude in the mid-80s is roughly where it should be. The real driver of high refined product prices has been Ukraine's ongoing attacks on Russian oil refineries. That kept crack spreads - the profit margin between crude and the fuel refined from it - elevated. Diesel now sits just 25 cents a gallon from its all-time record. The Kremlin said this morning that some of those hit refineries are coming back online, which nudged diesel modestly lower and could weaken crack spreads, easing both gasoline and diesel.
You Cannot Trust the Supply Numbers
Official estimates put about 8 to 9 million barrels a day moving through the Strait of Hormuz. Those numbers deserve deep skepticism. Fake data in commodity supply and demand is an old story. The parties reporting the data have a stake in it: brokerages, analysts, transporters, and producers all gain when prices rise, while consumers and politicians gain when prices fall. So the headline figures pull in different directions and cannot be relied on.
Even standing on the shore of the Strait, an accurate count would be impossible. There are too many ships, and many turn off their transponders and pass through at night. The true volume moving through is unknown. The price action is the better guide, and it says far more oil is coming through than most people realize - probably not as much as the administration wants believed, but a real amount. If little were getting through, oil would likely trade much higher, maybe in the $120s or $130s.
Not long ago the consensus view held that if Hormuz stayed closed for a couple of weeks or months, oil would run to $150 or $200. That did not happen. The conclusion: plenty of oil is leaking through. Trust neither the headlines nor the news, but do trust the price action.
A $4 Labor Day Would Be a Psychological Hit
The national gas average could hit $4 for Labor Day for the first time ever. Even with the relief coming, prices could still stay above $4.
That would land as a large psychological blow. Consumers remember gas at $5 in June of 2022, but few track prices by specific holiday. If the national average sits above $4 a gallon going into Labor Day this year, it sets a new all-time record and would be the first time Labor Day gas averaged over $4. Even if relief pulls the average back below $4, prices will very likely top the previous Labor Day record from 2012, when the national average was $3.83 a gallon.
Those figures are nominal and not adjusted for inflation, so $3.83 in 2012 stings more in real terms, but a $4 Labor Day is something never seen before. Relief may still arrive. The remaining wild card is hurricane season, which has been quiet so far and needs continued watching.
